Balancing different asset classes across a multitude of sectors and regions is the crux of multi-asset investing. But as the global economy slows and political uncertainty ratchets up, this task has become tougher – it's no surprise that many investors are stuggling to navigate the late phase of the economic and market cycle.
Multi-asset fund managers, whose task is to invest across a range of assets and region, says the key is to be dynamic and flexible.
Eric Bernbaum, portfolio manager at JPMorgan, has diversified his portfolio from just six asset classes at its launch to 12 today, including emerging market equities and global real estate.
“We still have six cores of exposure but are searching out more diversified income,” he explains. “We look for opportunities but we also reduce exposure when they stop being attractive as once they were."
Bernbaum is not the only multi-asset harnessing the power of diversification to offset the risks in the market and shaking up his porfolio's asset allocation. But not all managers are in agreement about where to put their cash.
Equities
Equity markets have soared in recent years, but a sell-off at the end of 2018 sparked concerns that volatility was ramping up. Investing in equities can be lucrative, but maybe this it's not the right time.
Bernbaum has reduced the equity allocation by 10 percentage points to 27% over the past year. The focus of the cuts have been UK, European and Asian equities, while Bernbaum has actually put more money into US stocks as he believes the economy there remains strong.
David Coombs, manager of Rathbone Multi Asset Portfolio funds, is also selectively sticking with equities. “We have jettisoned some Asian assets and increased our investments in the US," he says. "Our research tells us that it’s best to consolidate into defensive stocks at this time and the American market tends to be the most defensive in the world.”
Meanwhile, James Mee, manager of the four-star rated Waverton Multi-Asset Income fund, is finding opportunities in the turbulent UK market. “The UK looks very cheap,” he says. “Any kind of good news in terms of Brexit should attract inflows from investors boost the market."
Fixed Income
Bonds are an asset traditionally used to moderate risk in a portfolio, but as central banks start to reverse interest rate hikes, this area is not an easy one for investors to naviagate.
Bernbaum has been gradually increasing his exposure to bonds over the past two years. However, the manager has been eschewing government bonds and instead introducing European high yield bonds and short-term fixed income into the portfolio.
Around a third of his portfolio is in high-yield bonds - these provide a great coupon but come with a greater risk that the issuer will default on their debt. Bernbaum also likes US mortgage-backed securities - loans made against properties. "They offer attractive yield compared to Treasuries," he explains, "They are also liquid and defensive – a good diversifier in times of market stress."
Guilhem Savry, head of macro and dynamic allocation at Unigestion, is another manager looking to riskier investments including high-yield and emerging markets debt. Meanwhile, Andrew Harman, senior portfolio manager of First State Investment’s Multi-Asset Solutions, has reduced exposure to developed market government bonds including those issued by Germany, France and the UK, put off by the current yields on offer. Indeed, German Bunds are now offering a negative return to investors.
Commodities
Oil and gold have historically been safe-havens to use in period of uncertainty, although the fact that their price is often based on speculation and market sentiment makes them incredibly difficult to predict and to value effective.y
Waverton's Mee recently added oil to his portfolio because he thinks the outlook for the price of black stuff looks positive. Meanwhile, Coombs has added a gold ETF to his portfolio: "When more sinister economic clouds are poised to open and already low interest rates are cut further, investors will look to gold for shelter.”
Currencies
Currency exposure is an important variable to consider when investing. When an investor’s base currency depreciates, the returns on foreign assets are boosted and, conversely, when it appreciates, the returns on foreign assets are reduced.
Typically bonds are hedged into your base currency, which takes out the impact from any currency fluctuations. However, equities are often owned in the currency of wherever they are listed, which affects your returns when you translate them back to sterling.
While this isn't a general concern for long-term investors, fund managers can take advantage of changes in exchange rates to try and boost returns.
Stephen Doran, manager of multi-asset funds at Russell Investments says: “This is particularly important for sterling based investors in the current environment. Sterling has depreciated for several years, which has boost returns. But now that sterling looks cheap, there is a risk that this could turn - this could create a perfect storm if UK equities fall and sterling appreciates."
Combs lists Australian Dollar and Singaporean Dollar bonds as safe haven currencies he is turning to. Other managers, such as Mee, prefer the Japanese Yen, which tends to rise at times of global uncertainty.
