What next for multi-asset portfolios?

From an investment point of view it was “a terrible year”, says James Beaumont of Natixis Investment Managers, and added that for many investors the outcome was even worse than it might have been because they ignored diversification. 

He says: “For most of the previous decade, it seemed like there was no need for diversification, and clients were almost saying to their advisers that they didn’t want to be diversified. But last year was kind of payback in that regard, particularly as the big tech stocks fell. 

For Dorian Carrell, multi-asset investor at Schroders, the biggest change so far in 2023 is that “the markets are now happy to treat good news as good news.

Right now there is so much uncertainty, we aren’t really overweight to very much.David Coombs, Rathbones

"Previously, if there was good economic news, risk assets sold off because that was taken to mean interest rates would rise, and obviously in a scenario like that it’s very difficult to asset allocate.

"But in 2023, what we are seeing is that the normal diversifiers within a portfolio, such as bonds, are doing their job.”

James Sullivan, head of partnerships at Tyndall, says: “For the past 15 years or so, building a multi-asset portfolio has been akin to a golfer with only half their clubs in the bag.

"But that is changing, with bond yields now offering investors at least a nominal yield that is worthy of consideration, and if one looks through the inflation shock, then a longer-term real yield may also be had. Investment-grade, shorter duration credit looks good value if one considers the curve is flat at best – the premium pickup for duration risk just isn’t there."

David Coombs, head of multi-asset investments at Rathbones, says the economic data emerging around the world right now is “mixed” and so markets are “confused.”

But he says one area where a consensus is emerging is that interest rates may not rise by as much as had previously been expected, and it is this that led to technology shares “going on a bit of a tear” as investors focus on longer duration assets in 2023, as opposed to the shorter duration assets that were prioritised in 2022. 

We do not expect the past decade to provide the blueprint for the coming one.James Klempster, Liontrust

Coombs is uncertain that these consensus views are warranted, saying: “We have a situation in the US where unemployment is lower now, after a lot of rate rises, than was the case before rates went up. That is the precise opposite of what is supposed to happen, and leaves the Federal Reserve with a problem.

"In the UK, one of the things tat has helped consumers a little bit is that while food inflation remains high, energy prices are lower. And people spend more on energy than food so benefit a bit."

Uncertainty here to stay?

Interest rates peaking, technology stocks rising and inflation expectations declining produced precisely the market conditions that led to a long rally in government bonds, but James Klempster, deputy head of multi-asset at Liontrust, is among those sceptical that investors are in for a return to the market conditions that prevailed before 2022.

He says: “We do not expect the past decade to provide the blueprint for the coming one. Inflation is high and stickier than ‘transitory’ implied, but there are signs that we are through the worst. The period between the global financial crisis and Covid-19 of unusually low inflation is unlikely to return any time soon. 

"In a multi-polar world, with greater geopolitical divides than we have seen for many decades, the one-size-fits-all approach of long US dollar, US Treasury and the US stock market that was so profitable post-global financial crisis is unlikely to have everything its own way from here. Nuance will return. 

"Whether that is between equity styles or regions where higher interest rates will provide pitfalls to laissez-faire capital allocations, performance differentials will likely return. 

"Central banks in both the global financial crisis and Covid acted as a unified force, but are now focusing on domestic needs that are, by definition, unique, meaning that fixed income markets will no longer move in lock step."

Coombs' view is “the professional classes, because they can work from home at least some of the time, are better off, and that’s why the economy is holding up so well.

"Right now there is so much uncertainty, we aren’t really overweight to very much, but if we are overweight to anything it is to cyclicals right now.

"So we own long-duration bonds and we own cyclical assets. But the way bond yields are moving right now, how quickly they are moving, we could have changed that by next week. We also hold some gold as we always do.

"In terms of what would make us buy more US government debt, we would want yields above 4 per cent.”

In terms of his equity exposure, Coombs says: “If GDP growth does continue to pick up, then you want to own European equities rather than those of the US.”

Carrell is focused on emerging market debt and convertible bonds for his fixed interest exposure, but feels he needs “more confidence” in the economic outlook before he would increase exposure to non-US equities. 

Beaumont says he has been surprised at how strongly both equities and high-yield bonds have performed this year to date, but continues to be cautious on both asset classes. 

He says one of the issues that could impact high-yield bonds in the coming years is the refinancing that companies will have to do. 

This means that many companies who issued high-yield bonds will have to repay those and issue new bonds in the coming years; because this has not happened yet, the companies have continued to repay at the low interest rate available when they issued the bonds, but will have to accept much higher rates soon, and this could lead to companies defaulting on their debt.     

Sullivan says given the present highly uncertain climate, he prefers to own companies where there is greater “visibility” about profits, rather than companies which are expected to earn the bulk of their returns in the future, and right now, that points him away from US equities.

David Thorpe is investment editor at FTAdviser