Sunil Krishnan, head of multi-asset funds at Aviva Investors, talks to Succession Wealth financial planner Hugo Clay about some less obvious factors planners should consider when choosing a multi-asset fund. 

Hugo Clay (HC): When choosing a multi-asset solution, it’s important not to put all your eggs in one basket. Complementing an investment solution with a light value tilt with one that has a slight growth tilt can make the journey more comfortable for clients by blending investing strategies. What are your thoughts?

Sunil Krishnan (SK): A low-cost indexed multi-asset fund can fit in well with a core and satellite approach. Most of the growth can come from passive building blocks complemented by more active funds.

One view we hold is the importance of a global allocation versus a home bias. We believe in allocating globally on a cap-weighted basis, then adding a tactical UK tilt when that market offers good value.

The diversification principle would suggest equal weights between regions, but US earnings power has proven itself again and again, so we have increased our allocation to US equities over time.

HC: Does that give you a growth or value bias?

SK: Our portfolios don’t have a structural bias but, in our active ranges, we may choose to tilt towards a certain bias at a particular point in time. Currently, we have a slight value bias. Thematically, we have positions in European resources and energy that tend to rally strongly when value does better.

Another point is that, currently, the markets you are avoiding can do as much damage to returns as the ones you choose that then go wrong. We're paying more attention not just to what we like, but also to how we are managing our exposure to things we are more cautious on. A good example is Europe; it was unloved at the start of 2023 but has been the strongest performer since.

HC: Managers with a growth bias had a tricky year last year when value did well but are bouncing back this year. What is your outlook for tech?

SK: There are two interesting drivers of tech performance in recent years. One is how valuations are influenced by what's going on in other asset classes, the other is earnings power.

In 2022, investors faced multiple percentage-point rises in cash rates with no visibility on the eventual peak. This led to sharp rises in longer-term bonds, which are often reference points for valuing the longer-term earnings of growth companies. Today, even if cash interest rates rise a bit further, it is accepted that we are near the peak, so the scope for rapid rises in ten- to 30-year bond yields is limited. That's helpful for growth companies, and means investors can focus on earnings delivery.1

Twice in the past three years, I thought tech earnings might fall and both times they proved more resilient than I expected. Tech companies are always investing heavily, so they almost keep some profit in reserve because they can simply slow down the pace of investments when they need to reduce costs. That earnings power justifies their position.

Today, even if cash interest rates rise a bit further, it is accepted that we are near the peak, so the scope for rapid rises in ten- to 30-year bond yields is limited

There is a limit to that, because if investors feel confident about sharper earnings recovery elsewhere in the market, they will be willing to rotate. The point is higher valuations don’t tell the whole story – you have to understand what earnings delivery could justify the multiples and how achievable that is. We’re always watching this closely because of Big Tech’s importance to global equities, especially in the US and emerging markets, both of which we have added exposure to this year.

HC: Where do you see opportunities and risks in artificial intelligence (AI)?

SK: It’s too early to tell. Any company can harness AI – the ability to “train” models to perform complex and original tasks like writing reports or code or recognising and creating images. But any company can also be at risk of disruption. The fastest developments will probably be on open-source platforms where anyone can develop models, so proprietary systems like Google’s Bard may not have an advantage despite the size of the company. The breadth of possible applications means everything is up for grabs. As it develops, it could be an interesting theme for active stock-pickers to see what companies have the best plans to put AI to work.

HC: Do you believe that investing “sustainably” or taking account of ESG factors comes at a cost for investors, is a source of outperformance, or that you can achieve similar long-term returns but with periods of under- and outperformance compared to traditional solutions?

SK: It’s important to bear in mind that every theme has a price, whether it’s ESG, AI or regional investments, so nothing is ever a guaranteed route to outperformance irrespective of price. 

That said, I believe stronger governance puts shareholder returns high on a company’s priority list and companies that are stronger on the S as well as the G are probably in a better position when it comes to overall management of risks such as labour relations. My colleagues who focus on picking the future winners of the climate transition also say that, today, the real leaders are still undervalued as people underestimate the investment opportunity. In that sense, ESG considerations can certainly deliver outperformance, but they are hard to build into a long-term strategic assumption of extra returns you can set and forget. 

However, you can build a diversified portfolio from investments that score well from an ESG perspective and end up with a similar performance experience to an unfiltered approach. There will be times when it looks a bit different, but if I invest in a diverse set of ESG-aware approaches today, I think it’s unlikely I will look back in 15 years and see myself having missed percentage points in returns over that time.

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