Vincent Ropers, portfolio manager of the TB Wise Multi-Asset Growth Fund, outlines a multi-asset recovery playbook.
As we move out of economic recovery mode, multi-asset investors face a more volatile outlook. This was starkly underlined last week when all major Wall Street bank strategists turned bearish. There is a growing consensus that this bull market might run aground.
There is, to an extent, good reason for this shift in sentiment. By most measures, headline stock market valuations could be argued to be in the extreme. Meanwhile, flows into equities continue at record pace, leaving little room for error.
Moreover, a pull-back after market exuberance is nothing new – and, indeed, often deemed healthy. For example, since 1928, the S&P 500 has had a drawdown of 10% or more on 54 occasions, or about once every 1.7 years. Central banks are, so far, successfully managing to support the economy while preventing it from overheating. Yet as sentiment grows more fragile, the room for error is shrinking and investors could well lose their nerve as the year comes to an end.
But, as all good long-term investors know, it is time in the market that counts not timing the market. History shows us that rebalancing portfolios is a superior strategy than trying to forecast market crashes. We believe there remain many areas of attractive value within global markets for active asset allocators. Moreover, any volatility could provide an opportunity to broaden exposure.
Against this uncertain backdrop, we highlight six tactical allocation strategies that can help multi-asset investors safely plot a course though the post-recovery period.
Recycle the winners
With the current cycle advancing, the indices may look stretched, but this doesn’t mean everything is overvalued. In this environment, it is all about tactically shifting exposures or trimming positions to lock-in gains and unearth new opportunities.
We have been recycling the winners between our outperformers and using proceeds to invest in areas that still show significant upside and look quite undervalued. For example, on the back of strong performance we trimmed some of our UK equity names, including JO Hambro UK Equity Income and Polar UK Value Opportunities.
We used those profits to increase some of our more defensive growth names, where we can capitalise on structural, as opposed to cyclical, growth. These include funds such as Henderson EuroTrust and International Biotechnology Trust. We have also added to underrated infrastructure plays such GCP Infrastructure which taps into long-term structural trends, and displays more defensive characteristics than equities, as well as being an inflationary hedge.
Harness value opportunities
In the value space, although we have taken profits in the UK, we added to our position in the Polar Capital Global Financials Trust. We like the global remit of the strategy and its focus on a key sector for the recovery, which remains out-of-favour with investors.
Being a pure financials trust, the managers are also able to access opportunities in niche areas such as emerging markets financials or financial technology companies, which provide the trust with interesting growth potential as opposed to being simply a value play.
Raise cash levels
We are strong believers that multi-asset investors should make full use of the flexibility their broad mandates permit. As such, we are advocates of raising liquidity levels when conditions begin to imply higher volatility levels.
One of the key advantages of holding cash, particularly for active multi-asset investors, is that increased liquidity allows for opportunistic purchases when valuations decline to attractive levels and discounts widen for investment trusts. It is a means for us to stay on the front foot.
Central banks will be doing everything they can to taper stimulus without a market tantrum. But there is plenty of room for market gyrations against a complex macro-economic picture and a pandemic that has still not entirely abated. Hence, a cash position that does not present too much of an opportunity cost is sensible at this point. We currently hold 4.3% in cash, compared with our less than 2% average over the past five years.
Dig deeper in private equity
As the recovery is becoming more uncertain and some of the “easy gains” have already been made, it is particularly important to continue to look for opportunities for the next stage of the cycle.
Private equity is one of the most compelling themes across the investment landscape and remains significantly undervalued. Trusts that we own in this space, such as Oakley Capital Investments and Pantheon International, continue to trade at attractive valuations relative to their peers, and, at appealing discounts, to their net asset valuations.
These valuations look increasingly conservative in these trusts given the lag in their reporting at a time when public equity markets have continued to rise strongly. We have thus increased our position in our private equity holdings.
Invest in decarbonisation
At present, lower yields also reflect the uneasy sentiment about the future, as well as highly stimulatory measures from central banks, which might trigger inflationary pressures. This type of environment has been historically good for metals and commodities.
However, our focus of investment in this area is around the continued undervaluation of the mining companies, more so than in the metals themselves. We see opportunities in the relative potential of growth in precious metals miners versus the rest of the market, given the strength of their cashflows and of their balance sheets.
A further driving factor is the race to achieve net zero emissions. The world is moving from a fossil-fuel intensive economy to a materials-intensive economy. Miners, somewhat paradoxically, are essential to this decarbonisation process, if we are to turn the tables on climate change. We see selected investment trusts such as Blackrock World Mining Trust as a cheap way to access this long-term structural trend. Equally, listed utilities are often ignored by investors while they are an integral part of the move towards renewable energy. Trusts like the Ecofin Global Utilities and Infrastructure are another way we play that theme, without paying the hefty premiums attached to pure renewables trusts.
Be flexible in fixed income
With record low or negative yields on a range of government and investment grade securities, the risk/return reward in fixed income is not looking particularly appealing. That said, there are opportunities for investors willing to explore below the surface.
We increased our positions in more defensive plays as the cycle progressed, but only in strategies and trusts that present attractive upside as well as some protection relative to equities. For example, we increased our exposure in the TwentyFour Income Fund. This is a bond trust that invests in higher-yielding asset-backed securities such as mortgages, credit card debt and auto loans. Those assets have lagged the recovery despite presenting some cyclicality. Meanwhile, the quality of the credit work from the team at TwentyFour gives us protection on the downside and the fact that asset-backed securities use floating rather than fixed rates offers a hedge against rising rates if the reflationary environment proves more than transitory.
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