However, longer duration bonds tend to perform better in recessionary periods, so when the time is right we’ll tilt our portfolios in that direction.
On the equity side, we expect volatility to continue. We haven’t yet seen the impact of rate hikes on company earnings, so we’re maintaining a defensive stance and, as I mentioned, favouring equity income funds.
We believe well-managed companies that have been able to deliver stable dividends, even in difficult times, are likely to be rewarded with higher share prices.
FTAdviser: Is it time now for investors to be considering alternatives in multi-asset portfolios, such as infrastructure, property, currency shorting, etcetera?
SM: Alternatives can bring important advantages, so they’re always worth considering. We’re holding infrastructure funds in some of our portfolios, because we believe infrastructure companies can provide useful inflation protection.
However, it’s important to be aware of the risks. With infrastructure, regulatory change can have a major impact.
Meanwhile, direct property investments carry liquidity risk and currency shorting is complex, and tricky to execute – plus, of course, currency movements are notoriously difficult to forecast.
With alternatives, it is essential to understand these risks and ensure exposure levels are appropriate.
FTAdviser: Is there additional cost associated with shorting strategies and with diversifying into alternatives, and how do multi-asset fund managers go about creating asset class diversification, without increasing incremental costs?
SM: Costs are slowly coming down across the board and, while the charges for funds investing in alternatives are still relatively high, they’ve been falling in the face of investor pressure.
It’s also important to remember these strategies will seldom form a very large part of a multi-asset portfolio, so the higher marginal costs are unlikely to significantly increase overall portfolio costs.
FTAdviser: If we were to create a multi-asset portfolio from scratch right now, how different would it look from existing multi-asset portfolios in the market, generally speaking?
SM: The portfolios available to investors today have benefited from years of evolution, bringing significant positive developments in areas including investment strategy, governance, fund selection and ESG.
I’d suggest these portfolios are much more closely aligned with the needs of investors than would be the case with a portfolio that was created ‘from scratch’, without the benefit of all that experience.
FTA: Everything right now seems risky to the average investor. How can multi-asset managers help to reduce the risks in portfolios other than just diversification?
SM: Tactical asset allocation shifts and portfolio construction measures that, for example, avoid over-concentration in a particular investment style, can play an important additional role in helping to reduce volatility in portfolios.
