Hunker down or full steam ahead?
- Date: 15/08/2018
- Source: Investment Week
2017 could easily be characterised as 'risk-on' for financial markets. Buoyed by synchronised global growth, a phenomenon not seen since 2007, investors threw caution to the wind and bought into the riskier asset classes.
Emerging market debt, Asian equities, high yield, and commodities (to name a few) all saw strong returns in 2017 as multi-asset investors reached for opportunities to improve returns on their portfolios.
Fund managers were in similarly bullish mood, talking up their opportunity set with an optimism that could be mistaken for irrational exuberance at the top of the cycle.
Equity and fixed income managers alike positioned portfolios for a global economy that was firing on all cylinders.
In 'equity-land', even value names (or perhaps more accurately, cyclical names) had their brief moment in the sun.
Meanwhile, in the fixed income world, some stronger-performing names were drawn from the volatile energy sector, while companies with significant emerging market exposure also performed well.
For the multi-asset investor in 2017, it was difficult not to generate strong returns such was the level of optimism abound in financial markets.
Somewhat accustomed to a traditional 'Santa rally', December of last year was no exception.
There is an almost unwritten rule in finance that everyone goes home on Christmas Eve and comes back on 2 January, with an expectation that the valuation of their portfolios will remain virtually unchanged.
Yet, in the three trading days the FTSE 100 was open between Christmas and New Year, the index rose almost 100 points.
With markets off to the races in January, confidence among the global investor base was clearly near all-time highs.
Then came 2 February and the US unemployment report that revealed a large spike in wage growth; fears of an overheating US economy meant risk assets plunged.
Credit spreads widened, P/E ratios fell and sentiment had turned in the blink of an eye. Speculation about trade tariffs followed; speculation turned to reality while economic momentum, particularly in Europe, started to falter.
Throw in an anti-populist coalition government in Italy and 'risk' was very much back on the agenda.
With bond yields rising and prices weakening, no asset class was immune as both investment grade credit and developed market sovereign government bonds suffered losses.
Equity markets fell with emerging markets, China and the rest of Asia suffering the brunt of the trade war sell-off fears. With correlations high, multi-asset investors suffered with nowhere to hide and meaningfully protect capital values.
Fund managers too had been caught offside with those most stretching for risk suffering the biggest drawdowns.
Credit managers with their off-benchmark exposures to contingent convertibles (CoCos) were nursing losses, while EM equity managers with their overweight allocations to Chinese tech names cursed their luck.
What worked so well in 2017 reversed course in 2018. Most investors had their foot firmly on the accelerator and were not prepared for a speed bump, volatility picked up measurably and the market began to question the durability of the 'synchronised global growth' story.
Dichotomy in views
Speaking to fund managers today reveals a dichotomy in views; those who are shutting up shop in preparation for the end of the cycle, and those who feel there is still some juice left to squeeze.
Therein lies the crux of the issue for the multi-asset investor: do you prepare to hunker down for a period of low and possibly negative returns for risk assets or carry on full steam ahead, under the belief that risk assets have another significant leg up from here?
This is the point when portfolio construction and detailed understanding of the underlying funds in your portfolio can enhance risk-adjusted performance.
Being aware of credit spread duration across your corporate bond managers and having a grip on the beta of your equity fund managers are just two metrics that are key to controlling risk in multi-asset portfolios.
If you have not sat down with your fund manager recently, now might be a good time to assess their bullishness or bearishness. If either scenario makes you uncomfortable, it might be a good time to start tilting your portfolio.
Head of Collectives Research and Senior Portfolio Manager
Article first appeared in:
Investment Week (13th August 2018)
The opinions stated are those of the author and should not be taken as investment advice. Any recommendations may not be suitable for all, so please contact your financial adviser for further guidance.
Clients are advised that the value of all investments can go up as well as down. Any past performance or yields quoted should not be considered reliable indicators of future returns. Opinions, interpretations and conclusions expressed in this document represent our judgement as of this date and are subject to change. Furthermore, the content is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or a solicitation to buy or sell any securities or to adopt any investment strategy.
Thomas Miller Investment is the trading name of the businesses in the Thomas Miller Investment Group. Thomas Miller Wealth Management Limited is authorised and regulated by the Financial Conduct Authority (Financial Services Register Number 594155). It is a company registered in England, number 08284862. Thomas Miller Investment Ltd is authorised and regulated by the Financial Conduct Authority (Financial Services Register number 189829). It is a company registered in England, number 2187502. The registered office for both companies is 90 Fenchurch Street, London EC3M 4ST. Thomas Miller Investment (Isle of Man) Limited is licensed by the Isle of Man Financial Services Authority. It is a company registered in the Isle of Man, number 48181C. The registered office is Level 2, Samuel Harris House 5-11 St Georges Street, Douglas, Isle of Man, IM1 1AJ. Thomas Miller Investment is a registered business name of Thomas Miller Investment (Isle of Man) Limited. Telephone calls may be recorded.