By Newton Investment Management
Against a backdrop of volatility and macroeconomic uncertainty, investors might be wary about the future. Here, Newton multi-asset chief investment officer Mitesh Sheth and FutureLegacy portfolio manager Lale Akoner outline what they think makes a robust multi-asset portfolio in the current environment.
We have entered a market regime characterised by deglobalisation, decarbonisation and divergence, which requires an active, dynamic and sustainable approach to portfolio management, according to Newton multi-asset chief investment officer Mitesh Sheth and FutureLegacy portfolio manager Lale Akoner.
“We believe this next decade will be unlike anything we have lived through before,” says Sheth. “We cannot just rely on historical models and data, or experience alone to navigate this volatile regime.”
Sheth thinks volatility in markets has led investors to be nervous about saving for the future.
“People want their investments to keep pace with inflation, they want to remain resilient through this market volatility and leave a legacy, not just for their own kids but for all our futures on this planet,” he adds.
He argues in this environment it is important for investment management to draw heavily on multiple research inputs across asset classes. At Newton these include quantitative, fundamental, and sustainability research and even investigative journalism.
On a thematic level, Newton’s research considers the macro themes of big government, China’s influence, financialisation and the great power competition; and micro themes of the internet of things, smart everything, tectonic shifts, picture of health and natural capital.
Sheth says bringing this all together enables the investment process to be ‘joined up, agile and able to spot opportunities others miss – now and in the future’.
Dynamic and active
Other important factors in the current environment, Sheth adds, include being directly invested and actively managed.
“At a time of great divergence, we believe passive strategies may struggle to deliver positive real returns,” he says.
Akoner concurs that as capital becomes limited, talented active managers have a higher chance of outperforming benchmarks. She notes 2022 was the first year since 2009 that most active asset managers of equity mutual funds were able to outperform the S&P 500 index .
“This is because liquidity is getting scarce and the dispersion between stocks and sectors is increasing, leading to a boarder opportunity set for active managers,” she adds.
In terms of portfolio construction, Akoner argues tactical asset allocation, using a derivative overlay, is fundamental to navigating the current market volatility.
“We look at things like liquidity indicators, positioning and flow indicators as well as spreads data to see if there is any froth in the market,” she says. “We can use futures, forwards, and physical securities to navigate the environment tactically.”
In terms of long-term positioning, Akoner says the portfolios are overweight in healthcare and utilities while underweight in consumer discretionary and energy. When it comes to fixed income, portfolios are underweight duration relative to the benchmark.
“We think market is incorrect in pricing quick Fed cuts,” she adds. “We think especially the ample amount of Treasury issuance could contribute to the peak rate environment in the short term. When those rates start to come down, we could go neutral and move long equity futures.”
With decarbonisation also being a key facet of the new market regime, Akoner says it is important for an investment process to support the transition to a low carbon economy. This, she adds, means adopting an investment process that incorporates red lines for excluding certain companies. The FutureLegacy team then look for three buckets of investment opportunities:
- Solution providers – companies solving problems on sustainability through products and solutions. For example, heating, ventilation and air conditioning (HVAC) businesses
- Balanced stakeholders – companies with sustainable internal processes. For example, companies best in class for governance or high standards on human capital management
- Transition – companies at the start of their sustainability journey but showing a credible commitment to a transition business model
Akoner notes sustainable strategies in the wider industry have tended to have a growth bias, because they consist to a large degree of technology companies which can have lower carbon emissions. However, she argues quality is the primary factor the team look for which could then result in a stock being either value or growth.
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