In an evolving world of tighter monetary policy, increased volatility and moderating growth it is crucial to engineer solutions that can go the distance.
In 1829 Robert Stephenson revolutionised the steam locomotive when he invented Rocket. By bringing together several innovations, it became the most advanced locomotive of its time. It captured the public’s imagination and demonstrated the potential of the railway. Nearly 200 years later we have the Japanese Maglev, almost more science fiction than locomotive, it travels along a guideway of magnets allowing for a faster and smoother journey than conventional trains. With an incredible top speed of 375mph it is a far cry from Rocket’s top speed of 30mph.
Significant developments have also occurred in multi-asset investing – albeit over a much shorter time horizon. Take the advent of volatility-managed solutions, for example, which, over the last ten years, has signalled a change in approach. Unlike their predecessors they do not look to outperform a peer-group. Instead, risk is the primary objective and for a given level of risk they look to maximise returns.
However, with the threat of tighter monetary policy, increased volatility and moderating growth, it is reasonable to ask: How will these newer solutions fare?
2018 served as a reminder that global synchronised growth and buoyant asset prices, underpinned by central bank policy, cannot last for ever. To deal with the changing market conditions our multi-asset approach is based on three key tenets: a strong framework, dynamic management and smart componentry.
Strong framework: A globally diverse starting point to align to client risk profiles
Rather than following the crowd by outsourcing our asset allocation framework to a peer-group benchmark or a third-party provider, we design it in-house. Our starting point is a global asset allocation model, which is not only based on expected return and volatility, but on factors such tail risk, growth and inflation. This gives us a thorough understanding of the driving factors of risk and return.
From there, we divide assets into three simple categories to create effective diversification and enhance risk-adjusted returns. These are: Growth, Defensive and Uncorrelated.
Dynamic management: Adapting to market conditions and proactively managing risk
Once a strong framework has been established, we can then look to add tactical asset allocations, where compelling opportunities arise. Market conditions continually evolve, and rebalancing in a considered and adaptable way is sensible – particularly when compared to arbitrary monthly or quarterly schedules. This is especially pertinent when volatility is heightened, given the more fertile environment it creates for active asset allocators.
At the hub of our tactical views is our Asset Allocation Committee. This forum brings together the expertise of over 50 multi-asset experts, as well as key representatives of the investment strategy team and investment professionals. Based on qualitative and quantitative research, we collectively form our views on different regions and asset classes.
Smart componentry: Cost effectively selecting underlying assets
Regardless of the prevailing environment, implementing ideas in a cost-effective manner is key. One crucial decision is the choice between active and passive strategies. It is a debate which is usually couched as binary. However, we believe a blend of both strategies works well.
For example, we prefer to take a passive approach when allocating to large-cap US and Japanese equities. These markets are highly informationally efficient and liquid, making it incredibly difficult for an active fund manager to outperform.
Yet, we firmly believe that in markets that are not overcrowded and can be accessed at reasonable cost, skilled fund managers can materially improve outcomes for investors. Moreover, asset classes such as emerging market small-cap equities offer attractive expected returns but at additional risk to the more vanilla equity markets. Therefore, it makes sense to be more selective in terms of which companies you should hold.
Keeping on track
By following our three key tenets – strong framework, dynamic management and smart componentry – we aim to offer investors a solution designed and engineered to withstand the impact of a changing market environment.