By Casterbridge Wealth
Investing is often made to appear more complicated than it needs to be, and sometimes conventional wisdom isn’t really wisdom at all.
Nothing proves this more than the damage wrought by bonds during 2022. The so-called ‘risk-free’ asset proved anything but, and bond market falls in the region of 30% would have made for some difficult conversations with unsuspecting investors who thought their bond allocation gave them some protection.
The battering bond markets took last year is a great example of ‘group think’ within investing – where warning signs are ignored and it feels safer to travel with the herd. Unfortunately though, when it comes to Managed Portfolio Service (MPS) offerings, independent thinking is not part of the proposition. Instead, most choose to ‘play it safe’ and hug their benchmarks.
That’s all well and good if you believe in safety in numbers. But advisers may want to ask whether MPS portfolios are being managed to a benchmark for the sake of the client, or the sake of the provider. Because the simple truth is that clients don’t care about the benchmark; they just don’t like losing money.
We recognise the feeling, which is why one of the defining principles at Casterbridge is that we manage client money as if it were our own. In fact, when you don’t believe in benchmarks determining your asset allocation, it gives you the freedom to play to your strengths and act on your own insights.
So, when in 2021 central banks and the big investment banks were describing post-pandemic inflation as merely ‘transitory’, we were more sceptical. Our research, our experience of managing investment portfolios across numerous market cycles, and our belief in challenging conventional thinking told us that pent-up consumer demand and broken supply chains would lead to surging – and far stickier – inflation. Being benchmark-agnostic meant we could act on this view.
We therefore changed our portfolios to a maximum underweight in bonds, while holding shorter duration bonds capable of proving more resilient in a rising rate environment. As a result of this inflation hedging and bond underweight, the Hardy MPS range outperformed most of its peers by between 5% and 8% over 2022, meaning those advisers who recommend our Hardy range could have much more positive conversations with their clients.
Our agnostic approach also applies to choosing between active and passive investments for our portfolios. We don’t believe in restricting our investment universe, and think passive funds should be used as a building block of active asset allocation, not as the driver. We doubt that passive investments have the capability to outperform in the current environment, so we apply a blended approach that stays conscious of costs, while still giving portfolios the potential to outperform based on value judgements.
We’re always ready to share our thoughts on portfolio positioning or the future direction of markets. So, to have a frank and fearless discussion with us, get in touch on 0800 644 4848.
For more information about the Hardy Managed Portfolios, visit https://casterbridgewealth.co.uk/hardy-advisor/
By BNY Mellon Investment Management
Multi-asset investing has come a long way since the days when the 60% equity – 40% fixed income portfolio was the only game in town for diversification-seekers. Today, the marketplace has become markedly more sophisticated, with fund managers selecting from a rich array of assets. But have these funds become too complex for their own good?
Has the 60/40 spell been broken?
It cannot be denied the classic 60/40 portfolio has been a successful formula for investors down the years. It’s proven to be a simple, understandable and, with low turnover, cost-effective option for steady capital growth with lower volatility over the long term.
But now there’s a problem. The role of bonds as a natural buffer to equity-market volatility has been all but extinguished by quantitative easing’s distortion of the financial markets since the 2008 global financial crisis (GFC). This mattered little while central banks were in full money-printing mode as even government bonds, despite paltry yields, produced some truly stellar capital performance. However, as bonds moved into lockstep with equities, they shed their qualities as a backstop in times of crisis. As quantitative easing has morphed into quantitative tightening, total returns for bonds have lurched into a tailspin, leaving 60/40 investors to nurse some notable losses in the last year or so.
To make matters worse, the medium-term backdrop for 60/40 is not encouraging. The global economy is expected to enter a phase of lower growth, while higher inflation is starting to sap the economic life-force that is consumer spending. Uninspiring dividends and rich equity valuations complete the somewhat dispiriting outlook for an investment formula that typically only thrives when growth is on the up. So, with 60/40 funds seemingly poised to produce noticeably lower returns compared to long-term averages, can multi-asset funds step into the breach?
A growing presence in the market
Following the publication in the 1980s of research by Brinson, Hood & Beebower suggesting active asset allocation, not security selection or market timing, was the main driver of investment value, funds that switch dynamically between multiple assets classes began to increase in popularity. From the early 2000s their proliferation rose as the stinging losses brought about by the GFC forced investors to look at more diversified solutions offering better protection for capital.
The low-yield/high-volatility reality of the post-GFC environment spurred fund managers to investigate new ways of meeting investors’ objectives. This brought about the launch of products that sought to use a diverse yet complementary blend of assets to combine capital growth with downside protection and competitive income generation. Upending the rigidity of the old 60/40 model, the new multi-asset funds sampled a new spectrum of assets, a number of which were specially designed to play a defined role in those unconventional times.
The blossoming of multi-asset saw a new emphasis on equities, with fund managers tasking them with income-generation duties to complement their traditional role as the cornerstone of capital growth. Once alternative assets such as real estate investment trusts (REITs) and commodities were added to the mix and an active asset allocation framework applied, the familiar globally diversified balanced portfolio had evolved into something far more responsive and dynamic.
One size no longer fits all
In launching suites of multi-asset funds, typically graded by risk, fund managers sought to meet the rapidly evolving needs of investors. The traditional 60/40 portfolio had functioned largely as a generator of reliable, low-volatility growth and income for people approaching retirement. However, that model was no longer appropriate for younger investors, who were in need of stronger early-years growth to compensate for the withdrawal of both state pensions and generous final salary company schemes, and also for older investors, who were looking for higher income to maintain their standards of living as life expectancy rose. By dipping into the increasingly varied and thematically layered multi-asset market, investors were enabled to create a blend of strategies to neatly match their changing circumstances and aspirations from almost cradle to grave.
But could the “überdiversification”, now a feature of some multi-asset funds, actually be self-defeating? Could trying to cover too many bases mean that fund managers end up covering no bases at all? There is, after all, such a thing as too much diversification.
Complexity also compromises transparency. Investors typically gravitate to strategies that are easy to grasp, while the opaque mechanics of some of the more specialist assets risk being alienating. Today, people increasingly want simplicity.
Cost is a further unwelcome byproduct of complexity. Trading in fringe assets that are not widely understood may also attract higher fees (not to mention low relative liquidity), while the extra resources required for research and analysis risk pushing those ongoing charges into the red zone.
Pragmatism in the face of uncertainty
At Newton, we believe there is no blanket formula for success that can be applied across multi-asset funds, given the variety of roles they are expected to perform. The sector is simply too diverse and wide-ranging. So, instead of trying to cast our net too wide, we focus on understanding company fundamentals, because it is where we expect to find the best opportunities for capital growth and income.
The investable universe and client expectations have evolved to such a degree that we need to start thinking in different terms.
Find out more about multi-asset investing at BNY Mellon Investment Management
The value of investments can fall. Investors may not get back the amount invested.
For Professional Clients only. This is a financial promotion and is not investment advice.
Any views and opinions are those of the investment manager, unless otherwise noted. This is not investment research or a research recommendation for regulatory purposes.
For further information visit the BNY Mellon Investment Management website: http://www.bnymellonim.com. Doc ID: 1230450
By Lucy Haddow, Investment Specialist, Baillie Gifford
In July 1938, amid a turbulent political and economic backdrop, a team of German and Austrian climbers finally conquered the north face of the Eiger, a mountain in the Alps that had stolen many souls in the pursuit of a successful ascent.
While the problem had been cracked, it turns out there was no shortage of ways to solve it. The 1938 expedition took three days, but in 2015 the late Swiss climber Ueli Steck set a record ascent time of two hours, 22 minutes and 50 seconds. This goes to show that, the desire of humans to conquer challenges, grow and innovate continues, regardless of past success or what is going on in the world.
Against the backdrop of a tough 18 months for markets, one question has been asked over and over again: is this it for growth investors? The decade after the Global Financial Crisis was a great success, but have things changed? While some are now questioning if the solution for achieving long-term capital growth is still growth investing, we are of the opinion that it is.
The next decade will likely be very different to the one which has just passed and could prove to be testing for even the strongest businesses, not only due to a challenging economic environment but also due to delicate geopolitical tensions, most notably between the US and China. However, we have confidence in the resilience of our existing holdings, on top of which we believe there are reasons for long-term optimism, especially for companies that will further the integration of technology in our day-to-day lives.
Take the convergence of biology and technology, for example. This could represent a significant step forward for humanity as well as a meaningful investment opportunity. There are many high-quality health-tech companies in Europe, for instance, but we have found that valuation has always been a hurdle.
However, in light of recent market movements, we took the opportunity to reassess the situation and ultimately invest in CRISPR Therapeutics and Evotec. The former is a Swiss-American gene editing company that could drastically transform the treatment of many illnesses, from cancer to sickle cell disease. Furthermore, with around US$2bn on the balance sheet, it is in a position of financial strength.
German-listed Evotec is a business that companies outsource their research to as it can do this research faster and more cheaply. It is now evolving its business model to develop co-owned products to generate meaningful royalty payments, which could increase its already strong gross margins (20%).
Elsewhere, the demand for newer, cleaner energy sources continues apace – a trend only accelerated by the tragic war in Ukraine. One company driving energy innovation is Nexans – one of only two companies in the world able to lay sub-sea cables at extreme depths, a must-have for offshore wind. Another example is Fanuc, the Japanese robotics manufacturer, which is set to benefit from a broadening of applications as companies look to make entire plants more carbon efficient.
Growth can also be found in those companies addressing the more fundamental challenges too. Bellway, the UK house builder will struggle in the short term due to high interest rates and recession, but the reality is that the UK is not building enough homes right now. This is a profitable company with a robust balance sheet and a well-invested land bank.
Our job on the Baillie Gifford Managed Fund isn’t just to focus on near-term resilience but also to position the portfolio to deliver long-term capital growth. To do that, we need to find opportunities – ground-breaking businesses like that team of pioneering climbers, forging a path into uncharted territory, but also innovative companies, seeking new efficiencies and disrupting norms like Ueli Steck.
Baillie Gifford Managed Fund Annual Past Performance to 31 December each year (%)
Source: FE, StatPro, net of fees, total return in sterling. Class B Acc Shares. The manager believes an appropriate comparison for this Fund is the Investment Association Mixed Investment 40-85% Shares Sector median given the investment policy of the Fund and the approach taken by the manager when investing.
Past performance is not a guide to future returns. All investment strategies have the potential for profit and loss, capital is at risk.
This article does not constitute, and is not subject to the protections afforded to, independent research. Baillie Gifford and its staff may have dealt in the investments concerned. The views expressed are not statements of fact and should not be considered as advice or a recommendation to buy, sell or hold a particular investment.
The Fund’s share price can be volatile due to movements in the prices of the underlying holdings and the basis on which the Fund is priced. Investments with exposure to overseas securities can be affected by changing stock market conditions and currency exchange rates.
Baillie Gifford & Co Limited is authorised and regulated by the Financial Conduct Authority. Baillie Gifford & Co Limited is an Authorised Corporate Director of OEICs. All data is sourced from Baillie Gifford & Co unless otherwise stated.
By David Macfarlane, Director, Discretionary Wealth Management, HSBC Asset Management
We know there is an opportunity cost from not investing, particularly given the current inflationary pressures, but it’s important we help clients understand that short-term worries about market volatility shouldn’t override their long-term objectives.
Einstein is rumoured to have said that ‘compound interest is the eighth wonder of the world – he who understands it, earns it…. and he who doesn’t, pays it’. The simple message is, when it comes to investing, regardless of how volatile markets may seem, the earlier investors can start the better.
We ran a study1 that compared two investors, each saving $1,000 dollars a month. One started in 2004 and the other in 2007. We ran it to the end of 2021.
The investor who started in 2004 saved an extra $36,000 dollars into their pot (by starting three years earlier), but by the end of 2021 the earlier investor had a pot worth $133,000 dollars more – having only put in an extra $36,000 dollars. A great example of the power of compounding and the difference a delay in starting could cost in the long run.
But what about the worries your clients have of staying invested during falling markets? The amount of cash in a savings account doesn’t really change from one day to the next so we feel in control of it, even if we aren’t seeing the impact of inflation on purchasing power. However, Benjamin Graham, author of ‘The Intelligent Investor’ advises us that ‘you will be much more in control if you realise how much you are not in control’.
We can’t control markets but by focusing on risk profiles, asset allocation, fulfilment and cost, and filtering the noise, we look to deliver strong risk adjusted returns, as we know these factors are key in driving long-term returns.
Napoleon said, “A genius is the man who can do the average thing when everyone else around him is losing his mind.” Does ‘do the average thing’ mean remain invested? In many instances, yes.
We looked at what would have happened if an investor had put $100,000 dollars into a basket of global equities from 2005 – 2022. Over those 17 years, just leaving things be, gave an average annual return of 8.1%.2
We then stripped out the top 20 days in that 17-year period. These accounted for only 0.3% of the total number of days but, crucially, by missing those 20 days in that 17-year period, returns dropped from an average 8.1% per year to 1.8% a year. This means that by missing the 20 best trading days, the final balance would have reduced from $380,000 to just over $136,000. It’s simplistic, but this example helps highlight why it’s often important to remain invested, even during periods of volatility.
Given the speed at which information flows around the globe these days, we often lose sight of the longer-term picture and spend time focussing on the here and now. We can check markets on our smartphone 24 hours a day, fretting that markets have fallen, forgetting why we’ve invested in the first place.
So, when volatility picks up, it’s important to communicate to clients how time can be the most powerful force in investing and remember the thoughts of Einstein, Graham and Napoleon.
The HSBC Global Strategy Portfolios are HSBC Asset Management’s flagship multi-asset solution for Advisory clients. The range includes five funds, tailored to different investor risk attitudes and diversified across key asset classes and global regions, including developed and emerging regions. Visit www.assetmanagement.hsbc.co.uk to learn more.
 Source: Bloomberg, HSBC Asset Management. Investing = MSCI AWCI Net Return Index, 1 January 2004 to 31 December 2021.
 Source: HSBC Asset Management, Bloomberg, Returns are for developed markets stocks – MSCI World Daily Total Return Gross World Index, as at January 2022
For Professional Clients only
The material contained herein is for marketing purposes and is for your information only. This document is not contractually binding nor are we required to provide this to you by any legislative provision. It does not constitute legal, tax or investment advice or a recommendation to any reader of this material to buy or sell investments. You must not, therefore, rely on the content of this document when making any investment decisions. The value of investments and any income from them can go down as well as up and investors may not get back the amount originally invested. Approved for issue in the UK by HSBC Global Asset Management (UK) Limited, who are authorised and regulated by the Financial Conduct Authority. Copyright © HSBC Global Asset Management (UK) Limited 2022. All rights reserved. ED 3849. 31.07.2023.
By M&G Investments Sustainable Multi Asset Team
Despite the pandemic and the recent slowdown in global economic growth, the take-up of sustainable investment strategies continues to expand, forming a permanent fixture in the investment landscape for millions of private and institutional investors the world over.
Opportunities across the spectrum of sustainable investing continue to grow, as companies and governments strive to develop products and solutions to meet the world’s social and environmental challenges.
The spectre of persistently high inflation now threatens to deliver an environment of lower growth and shrinking corporate profits in many countries. As stock and bond markets demonstrated during the first half of 2022, these fears, combined with significant hikes in interest rates, can easily translate into a challenging environment for investors. Some sceptics argue that a significant deterioration in the outlook will affect ESG and sustainable investing disproportionately, as investors could begin to question its wisdom in the face of lower growth, geopolitical uncertainty and energy security concerns.
However, we believe the opposite is true: sustainable investing presents long-term solutions to many of the challenges we are currently facing. Therefore, we attempt to position our sustainable multi asset portfolios towards various structural tailwinds, as governments, industries and consumers direct capital towards lowering emissions, driving efficiency, reducing waste, bringing equality to underserved groups of the population, or providing an efficient, innovative and affordable healthcare system. As long-term investors, we pick what we consider to be quality securities that we would be happy to hold for many years, through multiple economic cycles.
We think that many of the long-term growth success stories of tomorrow will come from today’s attempts to tackle systemic risks, such as climate change. We must also acknowledge the long-term investment horizons of sustainability-related holdings, which can make them, in some cases, potentially less susceptible to bouts of volatility during times of uncertainty.
Where are we seeing opportunities?
As nations rush to enhance their energy independence in the wake of the recent geopolitical turbulence, a focus on companies leading the transition to a renewable energy future seems sensible to us. Renewable energy specialist SolarEdge Technologies has been a successful long-term holding in our sustainable multi asset strategies range. The company is a global leader in solar technology and offers a diversified product range for residential and commercial use, including its main product proposition, photovoltaic (PV) inverter solutions. The rapid deployment of solar PV could help solar energy become the largest source of low-carbon capacity by 2040, by which time the share of all renewables in total power generation is expected to reach 40%.
Another recent and particularly relevant investment – given that severe drought has affected so much of the world in 2022 – is global water technology company Xylem. The business designs and manufactures equipment and services for water and wastewater applications. The company operates across the full cycle of the water usage process, from collection and distribution to use and return to natural environment. Sustainability was brought into the heart of its funding strategy in 2020 when the company announced its inaugural green bond worth US$1.0 billion. The proceeds are being used to fund projects that will help improve water accessibility, water affordability, and water systems resilience.
Sitting within our Social Inclusion holdings, Home REIT, a member of the FTSE 250 index, is dedicated to fighting homelessness in the UK by funding the creation and acquisition of high quality accommodation for the homeless. The firm helps to convert or refurbish existing buildings and accommodation and also provides forward funding for new-build projects. We think the firm’s portfolio delivers much-needed, tailored accommodation for vulnerable homeless people, and we have been invested since its IPO in October 2020.
Investing towards a better future
At M&G we believe the investment industry needs to evolve. Rather than short-termism and quick wins, we believe investing requires forward thinking, a long-term outlook and active engagement with companies, helping them to adapt and make a more meaningful and lasting impact on our world.
We think the cross-asset nature of M&G’s sustainable investable universe (green bonds, supranationals, listed infrastructure, equities) affords us the breadth of opportunities to invest flexibly for the long term, in order to help us generate returns and have a lasting impact on the world’s future.
When it comes to the world’s most pressing issues, there’s no quick fix. But by investing sustainably in a pragmatic and measured way, we can work towards a future that’s better for everyone, delivering positive returns for both investors and the planet.
Find out more
The value and income from a fund’s assets will go down as well as up. This will cause the value of your investment to fall as well as rise and you may get back less than you originally invested.
For financial advisers only. Not for onward distribution. No other persons should rely on any information contained within. This Financial Promotion is issued by M&G Securities Limited which is authorised and regulated by the Financial Conduct Authority in the UK and provides investment products. The company’s registered office is 10 Fenchurch Avenue, London EC3M 5AG. Registered in England and Wales. Registered Number 90776.
By Evelyn Partners
Financial advisers are accustomed to scrutiny. From Know Your Customer to Treating Customers Fairly, they have long had to prove that they are acting in the best interests of clients. However, this scrutiny is likely to move up a gear over the next 12 months, as Consumer Duty rules, a cost-of-living crisis and weakening financial market returns collide.
Consumer Duty will be increasingly familiar to advisers. It requires firms to demonstrate that they have delivered good outcomes for retail customers. This, says the FCA, means they need to “act in good faith, avoid causing foreseeable harm, and enable and support customers to pursue their financial objectives.”1
Compliance with Consumer Duty is becoming a reality and is likely to place new requirements on advisers to evidence the value for money they deliver to clients. They will need to show clearly that they are improving customer outcomes for the fee they charge.
In November, Therese Chambers, Director of Consumer Investments at the FCA, said: “We are constantly challenging firms to consider their current practices through the lens of the Consumer Duty – I cannot emphasise enough that this is a different lens to what (advisers) have been used to and even though the rules are not yet in force it requires active participation to understand the degree and extent of the cultural shift that it entails. A tick-box approach to detailed regulatory requirements will simply not be good enough as that will never be sufficient to answer the question of whether a firm has secured good outcomes for its customers.”2
The FCA says advisers need to show how they are monitoring investments, assessing new and emerging risks, any actions taken to address those risks and an assessment of whether the firm’s business strategy is consistent with delivering good outcomes. This may not be easy when, after the initial set-up costs, many clients in the accumulation phase may not require a significant amount of financial planning with the advisers’ role focused more on encouraging clients to make regular contributions into ISAs and SIPPs.
The market environment is compounding the problem. In recent years, market beta has done the hard work on investor returns. However, as economic growth slows, inflation and interest rates rise, markets are unlikely to provide a tailwind. At the same time, the world is facing some significant global challenges – climate change, deglobalisation, geopolitical tensions – and investment solutions need to be nimble and responsive.
In recent years, passive 60/40 solutions have been a good option. Investors watching their portfolios tick higher were unlikely to ask too many questions. However, this may change as markets become more complicated and volatile. These ‘cheap’ solutions may start to struggle because they don’t have the flexibility to respond to a changing market environment.
Against this backdrop, advisers need to be prepared for some self-analysis, particularly if they are running their own model portfolio services. There are likely to be new requirements to evidence price and value for those portfolios, and the requirements may be very different to those for a firm adopting a packaged investment solution. Firms will need to show consistency in the way they assess different pricing and service models within their investment propositions.
Equally, advisers need to be prepared for an increase in their already-onerous administrative burden. They will need a revised approach of all the proof points, and the new areas they need to document.
Flexibility, but consistency
How can advisers give themselves the best possible chance of meeting regulatory and client expectations in this new environment? Advisers need to be wary of one-size-fits-all solutions, which may draw the attention of the regulator. Advisers need a clear investment philosophy and process, but it should lead to different outcomes. They will also need to demonstrate that their solutions are sufficiently flexible to meet changing client needs and adapt to shifting financial market environments.
Outsourcing investment management responsibility can help, particularly with consistency of outcomes. It means an adviser can go on a holiday without worrying about their client portfolios while they are away. They don’t have to divert their attention from their business because markets are volatile, or an investment has gone wrong. An appointed investment management firm will have broader resources, ensuring that there are dedicated investment managers always working on client portfolios.
However, outsourcing is not a panacea. Advisers will need to ensure the solutions they choose have embedded flexibility. That may mean using a handful of providers that can offer a broader range of services. We believe that active management – dynamic asset allocation and careful security selection – will be important in the years ahead. Picking the lowest cost alternative could prove a false economy.
At Evelyn Partners, we have three types of Model Portfolio Services designed to suit the needs of different investors.
For the price sensitive investor, our Core Managed Portfolio Service is managed using a blend of active and passive funds with lower OCFs and additionally offers an element of downside protection. For the more experienced investor where the need for greater diversity is important our Active Managed Portfolio Service uses assets beyond the traditional basket of collectives and so offer investors a greater potential return over the longer term. Finally, investors keen to ensure their money is only invested in companies with an awareness of the environmental, social and governance criteria we offer a range of Sustainable managed portfolios.
Advisers can use our services flexibly, as a full-service solution, or mix-and-match.
The next 12 months may bring increasing challenges for financial advisers, and they may have to re-examine their approach to investment selection and monitoring. However, there are compelling options already out there that may offer a solution for this new environment.
This article is solely for professional advisers and should not be construed as investment advice.
The value of investments can go down as well as up and investors may not get back the amount invested. Whilst considerable care has been taken to ensure the information contained within this article is accurate and up-to-date, no warranty is given as to the accuracy or completeness of any information and no liability is accepted for any errors or omissions in such information or any action taken on the basis of this information.
Issued by Evelyn Partners Investment Management Services Limited, authorised and regulated by the Financial Conduct Authority
By Keith Balmer, Director and Portfolio Manager, Multi-Asset, Columbia Threadneedle Investments
In 2017, Britain invoked Article 50 of the Lisbon Treaty, triggering the initiation of proceedings to break away from the European Union. The Brexit vote, of the previous year, had been merely advisory, activating Article 50 meant there would be no turning back.
It was against this turbulent background that we launched a low-cost, actively managed multi-asset range; a risk-controlled portfolio option designed to cover a host of growth and income needs – the Columbia Threadneedle [CT] Universal MAP range.
The differentiated offering gave investors access to a truly active strategy, delivered at a competitive fee on par with peers’ passive multi-asset strategies.
In the five years since the funds’ launch, the world has had a torrid time. One view might be that this was a terrible time to start a multi-asset, risk-targeted, investment range. However, a more positive take, ours, is that it has also been a brilliant time, because the volatility has given us the opportunity to showcase the benefits of active investing – differentiating the Universal MAP funds from more static, benchmark-aware products.
We wanted to avoid concentration risks, building a diversified portfolio across styles, factors, and timeframes. While this would likely miss out on the highest highs, it would also avoid the lowest lows, delivering clients a smoother return profile.
Challenges and triumphs
The CT Universal MAP range has faced challenges from bull markets to bear markets, deflation to inflation and a global pandemic, accompanied by an artificially induced recession chucked in for good measure.
Our active management decisions have, on aggregate, added value at all three levels, strategic asset allocation, tactical asset allocation and stock selection.
The diversification of timeframes and investment styles has given us the tools to navigate most market environments and enabled us to deliver top quartile returns to investors. What’s more, that top quartile performance has been achieved within risk parameters and at a cost that remains very attractive relative even to passive strategies.
Cash ready for the about turn in growth
In 2022, with good news in short supply, inflation rising and interest rates climbing, all asset classes had a difficult time. In the portfolios, we cut our equity exposure and moved tactically underweight, although we retained an overweight to the FTSE100, on the view that multinational companies in the index should benefit from weaker sterling and continued higher energy prices.
While the growth outlook for 2023 is fairly gloomy, the case for holding high-quality fixed income has become more attractive. Having been underweight fixed income almost all of 2022, we ended the year overweight government bonds. At the same time, we reduced our exposure to both investment grade and high yield bonds.
So, as another trip around the sun beckons, we look forward to the challenges and triumphs that 2023 will bring, poised to deploy cash when new opportunities arise.
To find out more about the low-cost active CT Universal MAP ranges, visit columbiathreadneedle.co.uk/umap
The value of investments and any income derived from them can go down as well as up as a result of market or currency movements and investors may not get back the original amount invested.
© 2023 Columbia Threadneedle Investments. Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies. For professional investors only. This financial promotion is issued for marketing and information purposes only by Columbia Threadneedle Investments in the UK. The Funds are a sub funds of Columbia Threadneedle (UK) ICVC III, an open-ended investment company (OEIC), registered in the UK and authorised by the Financial Conduct Authority (FCA). English language copies of the Funds’ Prospectus, summarised investor rights, English language copies of the key investor information document (KIID) can be obtained from Columbia Threadneedle Investments, Exchange House, Primrose Street, London EC2A 2NY, telephone: Client Services on 0044 (0)20 7011 4444, email: email@example.com or electronically at www.columbiathreadneedle.com. Please read the Prospectus before taking any investment decision. The information provided in the marketing material does not constitute, and should not be construed as, investment advice or a recommendation to buy, sell or otherwise transact in the Funds. The manager has the right to terminate the arrangements made for marketing. Financial promotions are issued in the United Kingdom by Columbia Threadneedle Management Limited, which is authorised and regulated by the Financial Conduct Authority.
By Tim Drayson , James Carrick, Legal and General Investment Management
Markets suggest the US has almost reached an inflection point, while the UK and Europe have further to go in their battles against inflation.
Prospects for the global economy are mixed, at best, this year: While the US should follow the UK and Europe into recession, we expect China to bounce back after scrapping its zero-COVID policy.
Over the past few years, the global economy overheated. Fiscal and monetary policy support were lavish during the pandemic, pushing up demand. But supply was reduced – both in labour markets (due to early retirement, reduced migration, school closures and self-isolation) and energy markets, particularly following Russia’s invasion of Ukraine.
This resulted in excessive inflation and, in turn, aggressive monetary tightening. With commercial banks beginning to tighten credit availability, we appear set for recession. Official US GDP data have been volatile, but the underlying details and survey data point to a loss of momentum. The housing market is dropping, consumers are burning through their excess savings and corporate fundamentals are deteriorating.
Given elevated job vacancies, there is considerable uncertainty as to how long it will take for unemployment to rise. However, we expect recession to begin in the spring and for output to fall throughout the rest of 2023. Unlike last year, market participants are close to pricing in enough additional hikes for the Fed; we also see the prospect for rate cuts towards the end of the year.
The situation is worse in Europe and the UK, where the energy supply shock is most acute and worse than similar crises experienced in the 1970s. Not only are real incomes being squeezed, but central banks are also tightening forcefully to limit second-round effects.
The UK has also suffered from policy blunders. These have resulted in market pressure forcing the government to deliver tighter fiscal policy than would have otherwise been necessary.
More positively, a mild winter has dampened the energy price shock, though the outlook remains uncertain. Another welcome development is that supply-chain disruptions – which led to a surge in goods price inflation in 2022 – are rapidly improving, aided by cooling demand.
Service-sector inflation will likely prove much stickier, in our view, but recession and rising unemployment should reduce wage pressures as the year unfolds. The extent of rate cuts by central banks later this year and into 2024 will likely hinge on whether core inflation can make it all the way back to target or if it settles at a still somewhat uncomfortable level.
Meanwhile, the outlook for China is much better following the abandonment of its zero-Covid policy. The economy suffered a significant setback in the last quarter of 2022, but we expect a rapid rebound this quarter as its Covid wave peaks. Recent policy initiatives for the property sector also seem to be a gamechanger. These should allow the property market to bounce back to health, without triggering another unsustainable boom.
Disclaimer: Views in this blog do not promote, and are not directly connected to any Legal & General Investment Management (LGIM) product or service. Views are from a range of LGIM investment professionals and do not necessarily reflect the views of LGIM. For investment professionals only.
By Damien Lardoux, Head of Impact Investing, EQ Investors
The level of market volatility seen in 2022 can be disorienting for even the most experienced investors. In challenging markets such as these, we can use valuations to gauge the attractiveness of the stock market over the next few years.
With a current valuation multiple of 15.5x their expected profits in the coming 12 months (forward PE ratio 1), global equities experienced a significant derating in 2022. Valuations were as high as 25x in 2020 and 2021, reaching levels not seen since the late 1990s. At the current multiple, we are below the 10-year average and broadly in line with the 20-year average, so these are reasonable entry points for medium- to long-term investors.
In the short-term though, uncertainty is high whilst the future path for inflation and interest rates remains unclear. If US inflation2 decreases to 3% or below by the end of 2023 (as is currently expected by the market), it is very likely that interest rates will come down and valuation multiples expand.
However, if inflation proves to be more stubborn than expected and plateaus at 5% for example, central banks could maintain their hawkish stance for longer and put further downward pressure on valuation multiples in the short term. In our opinion, inflation will remain the key driving factor of market sentiment and valuations in 2023.
As company valuations decreased in 2022 with bigger falls experienced by smaller size companies, we have seen several mergers and acquisitions announced by larger, more established companies looking to grow. In the last two months of the year, we saw several bids for fast-growing companies that offer innovative and greatly sought-after sustainable products and services.
The following three examples highlight, in our opinion, just how attractive current valuations are for the sustainable themes in which we invest.
Fast growing companies in this sector saw significant profit-taking in 2022 after a strong period of outperformance during the pandemic. Abiomed, is an innovative and profitable US company which has developed Impella, the world’s smallest heart pump. By November 2022, Abiomed’s year-to-date share price change was down circa -30%. Johnson & Johnson, the world’s largest healthcare company, saw this as an opportunity and made a $17 billion bid to purchase the heart pump manufacturer, representing a 48% premium to where shares were trading.
Denmark’s Novozymes is the largest discoverer, manufacturer, and marketer of industrial enzymes in the world. Its enzymes have a vast array of applications, spanning food, agriculture, and healthcare. In December, Novozymes announced a merger with Chr. Hansen, another Danish company, which supplies bacterial cultures and enzymes across the food sector. The deal will likely lead to Novozymes solidifying its position as a leader in sustainable food production at a time when supply chain weakness and resource security is at the fore. Novozymes has proposed paying a 49% premium to Chr. Hansen’s market value, which before the announcement was down -14% in the year-to-date.
Berkshire Hathaway’s legendary founder, Warren Buffet, is well known for his disciplined investment approach and his caution vis-à-vis technology stocks. In November, Berkshire Hathaway announced a $4.1 billion investment into Taiwan Semiconductor Manufacturing Company, the world’s largest manufacturer of semiconductors. Whilst Warren Buffet hasn’t commented publicly on the deal, the company trades on a cheap valuation – shares were down -36% in the year-to-date. It is a leader in its field and has solid fundamentals – all of these are likely to have attracted Buffett as an investor.
With an expected economic slowdown and recession ahead, we believe that large corporates and investors will be bringing back their attention to companies that can achieve strong and sustainable earnings growth.
In our view, a lot of these opportunities can be found within the healthcare, sustainable food and technology industries, and the recent drops in valuations make those even more attractive, particularly for medium to long-term investors. We firmly believe that the EQ Portfolios are well positioned to benefit.
 Price divided by 12-month forward consensus expected operating earnings per share, Source MSCI, Index: MSCI AC World Index, December-2022
 US Consumer Price Index
2022 was one of the worst years on record for a US 60/40 portfolio. Here, Louis Finney and Nicole Goldberger, from the UBS multi-asset team, explain the appeal of diversifying exposures beyond traditional stocks and government bonds.
For much of the past 25 years, investors have benefitted from a consistently negative correlation between equities and bonds. Simply put, when equities sold off, investors could generally rely on bonds to provide ballast and protection in a multi-asset portfolio.
However, persistently elevated inflation and aggressive central bank tightening campaigns have put financial markets under significant pressure. Investors have had virtually nowhere to hide: the total return from global stocks was -21% through the first 10 months of 2022. Global sovereign bonds and credit also performed poorly, with total returns of -22% and -21% respectively, over this same period.1
This has seen the typically negative stock-bond correlation turn positive. As of mid-November, the year-to-date return from a portfolio with a 60% weighting to US stocks and 40% weighting to US Treasuries was -15% (Chart 1). There have only been five calendar years on record in which the annual performance for this traditional portfolio structure has been worse – and besides the 2008 global financial crisis, all were more than 80 years ago.
Chart 1: 2022 has been one of the worst years on record for a US 60/40 portfolio
Source: Goldman Sachs Investment Research Division, as of 16 November 2022. Based on performance of S&P 500 and US 10-year Treasury note, rebalanced daily.
Good news about bad markets
We acknowledge that the near-term macro outlook is unusually uncertain. But regardless of what 2023 brings, we believe the inflation, growth, and geopolitical factors that have caused market strife in 2022 are increasing the potential rewards for medium- and long-term investors willing to bear these risks. This is the good news about bad markets.
We develop capital market expectations, which are projections for how different asset classes will perform over five years given our assumptions for growth, inflation, monetary policy, and other key macro factors. These estimates indicate that now is a much more attractive investing backdrop compared to 12-15 months ago. In our baseline scenario, expected five-year annual returns for a global 60/40 portfolio are now 7.1%, vs. 3.3% in July 2021, while real (that is, inflation-adjusted) returns are 4.2% vs. 1.2% (Chart 2).
Chart 2: History of five-year expected annual returns for a global 60/40 portfolio
Source: UBS-AM, as of 31 October 2022. Note: the Y axis shows the annual 5-year geometric return (%) in USD terms. Nominal returns are in current dollars, while real returns are inflation-adjusted. The reference indexes are MSCI All-Country World Index (unhedged USD) and Bloomberg Global Agg (hedged USD).
This is the best outlook for returns since at least the fourth quarter of 2018. For investors who embrace diversification and augment portfolios with additional asset classes, the prospective return profile is even better. This is particularly pertinent in the current environment, where investors have to entertain the possibility that more inflationary macroeconomic regimes endure for some time.
The main driver of better expected returns across asset classes is the improvement in valuations relative to those embedded in our capital market assumptions from mid-year 2021. More favourable valuations, while retaining a similar outlook for real activity, naturally entail higher return expectations, all else being equal. Our expected return on cash has increased substantially, from less than 1.0% to 3.8%, following substantial interest rate hikes by central banks.
The extent of monetary tightening is linked to another change in our estimates: the average outlook for inflation over this horizon, which has risen from near 2% to close to 3%. Importantly, while more robust price pressures help improve nominal expected returns, expected real (inflation-adjusted) returns across asset classes have also improved materially.
Currencies are another key consideration. The US dollar has become even more expensive over the past year, which in our projections increases the expected depreciation of the US dollar over time as it reverts towards fair value. We believe this is poised to boost returns for USD-based investors who hold international assets over a five-year horizon.
Across the major liquid asset class of equities, government bonds and credit, our baseline outlook for expected returns is meaningfully higher as of October 2022 than in July 2021 (Chart 3). The improvement in the return profile is most evident in assets that pay a coupon – government bonds and credit. This is a function of the higher starting point for risk-free rates thanks to central bank tightening.
With this regime shift, it is finally possible to earn some income in bonds. Perhaps this development is best illustrated by the dwindling stock of negative-yielding debt globally (Chart 4).
Credit markets, across both investment grade and high yield, are looking particularly attractive too. For example, the expected return of global investment grade credit has seen a huge jump, rising from a mere 0.5% to 6.8%. We believe this leads to the end of the TINA era (“there is no alternative” besides stocks). This should be a good-news story on the outlook for diversified multi-asset portfolios. We believe diversification beyond a broad 60/40 portfolio matters now more than ever with positive expected returns across asset classes and a less reliable negative stock-bond correlation.
Chart 3: Five-year expected returns: then and now
Source: UBS-AM, as of31 October 2022. Note: returns shown in USD terms.
Reference indexes for these asset classes are the MSCI All-Country World Index
(unhedged USD), Bloomberg Global Treasuries (hedged USD), Bloomberg Global Credit (hedged USD), Bloomberg Global High Yield (hedged USD), 3-Month Treasury Bill, and US Consumer Price Index.
Chart 4: The disappearance of global negative-yielding debt
Source: Bloomberg Global Aggregate Negative Yielding Debt Market Value (USD) Index, as of 17 November 2022.
A good time to diversify
We strongly believe that the persistence of unusually elevated macroeconomic uncertainty increases the appeal of diversifying portfolio exposures beyond traditional stocks and government bonds. In particular, adding a larger suite of assets to the portfolio should help address challenges posed by a prolonged period of elevated inflation
For example, in the Table we also present a more diversified portfolio consisting of global equities, a wider array of bonds such as global high yield, and exposure to real assets that can provide inflation protection. Applying our capital market assumptions, this diversified portfolio offers the same risk profile as the 60/40 portfolio, but with a superior baseline expected return despite a 5% reduction in the global equities allocation. Importantly, this portfolio’s projected returns are meaningfully better than the 60/40’s when inflation runs hot, that is, in the stagflation and reflation scenarios.
Brighter outlook for longer-term investors
Our five-year capital market expectations send a clear message: 2022’s pain may have laid the foundation for better future gains. The range of return projections, both at the portfolio level and for individual asset classes, remains wide – particularly in the near term. But for medium- and long-term investors, the outlook is much brighter now than it was.
We see benefits to diversifying beyond a broad 60/40 portfolio by incorporating additional building blocks in portfolio construction – a wider selection of markets within fixed income such as credit, as well as exposure to real assets. These diversified multi-asset portfolios are likely to be more resilient and better positioned to perform in different regimes, and in particular, more inflationary macroeconomic environments going forward.