HUB EXCLUSIVES PANEL DISCUSSION 2023 – MULTI-ASSET INVESTING: THE WORLD TODAY
Panel discussion, hosted by Cherry Reynard, with:
Daniel Hughes, Premier Miton Defensive Growth Fund Manager, Premier Miton Investors
Olivia Geldenhuys, Investment Director, Schroders
Mark Lane, Senior Investment Manager for MyFolio Sustainable Funds, abrdn
2023 brought a new environment. Arguably, it is a more normal environment, with interest rates closer to historic averages. But it has brought a fresh set of challenges, most notably on inflation. How are multi-asset managers adapting?
For most multi-asset managers, the clearest shifts have come in their fixed income weighting. Many have increased their fixed income weighting in response to rising yields, after a decade when they have been forced to look outside the bond market for ‘bond like’ characteristics such as yield and diversification.
Government bonds have drawn the lion’s share of this reallocation. Mark Lane, senior investment manager for MyFolio Sustainable Funds, abrdn, says the team has been shifting from shorter duration assets into higher carry options, such as government bonds: “The starting yield for many government bonds is far more favourable than 18m ago.
“However, we are cautious on corporate bonds: Spreads have not widened to any great extent and that asymmetry doesn’t feel particularly comfortable. Spreads don’t reflect the uncertainty in the broader environment.”
Daniel Hughes,manager on the Premier Miton Diversified funds, says the team has started to build out its traditional fixed income exposure, leaving them with a low weighting to equities compared to the funds’ recent history. This fixed income exposure is concentrated at the short-dated end:
Overall, he believes investors are getting better returns for taking less risk: “Given the amount of uncertainty still around, including inflation, it’s not worth taking a risk on longer duration assets. We are focused on really strong, high quality investment grade bonds, plus government bonds.”
Equity allocation
Within equities, Lane is moving away from higher risk assets: “Previously we had quite a high allocation to small cap. It was our high beta play. But we have reduced that exposure incrementally. However, it’s the fund selection and intra-asset selection that’s been most important.”
In the Premier Miton Diversified Growth fund, the equity allocation is currently the lowest the fund has ever had, though it remains at over 50%. Hughes says: “We still believe in the strategies we have and the value we see in different areas.”
Aligning equity holdings with long-term structural growth themes is important at a time when growth is scarce. Lane says that sustainability and decarbonisation are areas of focus. The Inflation Reduction Act in the US, plus initiatives across the world are driving capital into these areas. He adds: “If the US government is willing to write tax credits of billions, it will drive significant investment into companies providing those solutions.” >
Alternatives have played an important role in multi-asset portfolios as a bond substitute. However, there is less need for them now. Lane says their team is looking for something they can’t access through their strategic asset allocation approach. He adds: “There are funds that get a portion of their returns from short-dated credit, for example. We can do that ourselves.” The group has been adding a weighting in infrastructure, recognising it has a similar volatility profile to equities, but has historically offered protection in weak market environments.
Areas of vulnerability
With inflation sticky, there may be increased pressures on the financial system. Hughes says the first warnings came with the regional banking crisis in the US, but there may be more ahead: “Companies with weak balance sheets and high leverage will be vulnerable as they refinance, if they can refinance at all. Higher borrowing costs will have a negative impact on profitability and earnings.
“Over the next 18 months, there will be more defaults, certainly more than we’ve seen. We are avoiding weak balance sheet companies when we’re taking credit exposure and high yield parts of the market. Across our equity holdings, we are seeking out quality companies with strong balance sheets.”
Olivia Geldenhuys, investment director at Schroders, says: “It’s been a challenging couple of years and there is some fatigue on bad news. We expect a recession to play out in developed markets, although we cannot be sure when it will happen. We need to be very aware of the risks and make sure the path of returns for our investors is a journey they are comfortable with.
“However, even in this environment, there are areas where we can be optimistic. When the world changes, it allows for disruption and innovation. Those areas are quite exciting.”
