Multi-asset portfolio management is like cooking: you need good ingredients, but it’s the delicate combination of them that makes a good dish great.
Dishes need flavour – risk – but in the right and complementary quantity.
Like any investment decision, choosing how to create and a balance a portfolio for economic recovery is a matter of trade-offs. Individual strategies can look pretty sound on a stand-alone basis. If all these views are in a portfolio at the same time as an investor you need to ask yourself are you happy with that that overall level of risk?
Four investment themes for your portfolios, but don’t forget the risks:
1: Short duration in a rising rate environment
Fixed income that is less sensitive to rising interest rates such short-dated credit, loans, and high yield will hold its value better. However, this comes with higher credit risk, as this portfolio will typically be lower credit quality than all-duration investment grade credit.
2: Overweight risk assets generally
Risk assets are favourable for those investors predicting the global economy will grow, but don’t forget, risk assets are, well, risky.
3: Overweight real assets
Rising inflation, driven by healthy demand, feeds directly through to higher prices and yields in real assets. Property, infrastructure and commodities have the potential to do well in this scenario. However, many real assets have been bought for their relatively higher yield compared to bonds in recent years, but as this gaps narrows and even goes into reverse, investors may want consider switching back to bonds for yield.
4: Growth bias in equities
For those looking to capitalise on rising equity earnings, driven by economic recovery, growth stocks, small cap and emerging markets recovery are the likely beneficiary. Equity valuations have already priced in a lot of growth, raising the bar for where earnings have to come in in order not to be a disappointment
When constructing a portfolio made up of a range of different assets classes an investor needs to look at what will happen to each part of their portfolio if the economic recovery gathers pace. From here they can then decide where the best opportunity to profit from that exists. For example, if an investor ups the juice of their credit portfolio with lots of shorter-duration but punchier credit, they should consider toning down a growth or small cap bias in equity portfolio. If they were thinking about increasing their allocation to real assets, they could balance that with other high-yielding assets that might benefit from outflows from real assets. Finally, if an investor is overweighting risks assets generally, perhaps they should include some skill-based strategies that are less sensitive to the economic cycle, such as volatility-based strategies.
David Vickers is senior portfolio manager, Russell Investments Multi-Asset Growth Strategy