Important information 

As of 9th October, Waystone will be the fund ACD and any reference to Link or LF should be taken as WS or Waystone.

Back under the multi-asset bonnet

After a challenging year for all asset classes, the multi-asset team revisit their predictions for 2022 and describe how their pragmatic approach sets them apart.

The prior decade of loose monetary policy had encouraged cheap borrowing and pushed valuations of some sectors in the global economy to high levels. We explained how ‘growth’ companies had benefitted handsomely over this period, outperforming their ‘value’ equivalents. Crucially, we noted that this trend was set for a significant reversal, and indeed 2022 has played out that way for equity markets. Managers who dogmatically stuck with their equity growth style have seen performance suffer materially.

We believe this inflexibility happens because behavioural biases (irrational beliefs or behaviours that can unconsciously influence decision-making process) creep into investor behaviour over time. A decade of low rates and quantitative easing encouraged some to believe that growth as an equity style was the ‘only game in town’ and updated their investment philosophies accordingly. Unfortunately for them, but unsurprising to us, the unwinding of the performance gap between growth and value equity styles has been both sharp and dramatic.

Source: Jeff Weniger, Head of Equities, Wisdom Tree, using Refinitiv data as of 05/12/22

As we look ahead to 2023, we believe our philosophy of being balanced but nimble remains key to unlocking performance. This philosophy underpins one of our principal views for the forthcoming year; strategies that worked well in the previous era of lower rates are unlikely to be the early winners in the new world of higher interest rates. Betting the house so swiftly on growth outperforming again feels aggressive. As we noted in our previous article, evidence from previous cycles indicates that the outperformance of value has further to run (see graph above). Being pragmatic in our investment approach limits behavioural biases and allows best ideas to continually filter through.

The importance of bonds

Being considered in thought process and implementation reflects our approach in managing multi-asset portfolios. Take the example of fixed income, long derided by investors as ‘return-free risk’ in an environment of low yields. 2022 was the one year in 20 when returns were deeply negative. From sovereigns to corporate bonds, there has been nowhere to hide.

Source: Bloomberg Finance L.P. Copyright Bloomberg Finance L.P. Used with permission.

This has allowed some multi-asset funds to declare victory, almost a decade after they incorrectly declared the death of the bond market. Yet bonds have been closely correlated with equities and the returns on global equity markets in 2022 have been as negative as they have been in global government bonds. Being balanced generates better risk-adjusted returns, made more evident when the herd has been charging in the same direction for years.

We believe that risk-targeted multi-asset portfolios need exposure to bonds to construct optimal portfolios. Our approach blends several risk factors within global bond markets, including currency, region, spread, credit rating and default risk. This allows portfolios to be appropriately tilted wherever we are in the cycle; this factor alone can improve drawdown risk. Those that throw the bond baby out with the bathwater are losing a valuable tool in portfolio construction, negatively impacting the ability to deliver robust risk-adjusted performance. The yield available on bonds is far more attractive today, and through a considered portfolio construction approach we believe they will generate upside opportunity with strong downside protection characteristics in 2023.     

Last year’s article ended with an important message – that this was a year where discerning investors would be rewarded for being disciplined. We believe the performance of our risk-profiled multi-asset funds over the last year reflects this disciplined approach. 2023 will also prove challenging, as a global economy that may well tip into recession requires agility and balance from experienced fund managers. We optimise our portfolios daily, with no need to wait for monthly or quarterly rebalancing points. As important, we work tirelessly to remain unencumbered by behavioural biases – we don’t permanently love particular asset classes and hate others. We judge every holding, across all asset classes, on its own merit. As the financial market landscape continues to evolve in an era of structurally higher interest rates, our pragmatism remains our edge.     


Important Information

The value of investments may fall as well as rise and investors may not get back the amount invested.

The information contained in this document is provided for use by investment professionals and is not for onward distribution to, or to be relied upon by, retail investors.

No guarantee, warranty or representation (express or implied) is given as to the document’s accuracy or completeness.

The views expressed in this document are those of the fund manager at the time of publication and should not be taken as advice, a forecast or a recommendation to buy or sell securities. These views are subject to change at any time without notice.

The multi-asset funds may invest in property funds that may be illiquid and subject to wide price spreads, both of which can impact the value of the Fund. The value of the property is based on the opinion of a valuer and is therefore subjective.

Canada Life Asset Management is the brand for investment management activities undertaken by Canada Life Asset Management Limited, Canada Life Limited and Canada Life European Real Estate Limited. Canada Life Asset Management Limited (no. 03846821), Canada Life Limited (no.00973271) and Canada Life European Real Estate Limited (no. 03846823) are all registered in England and the registered office for all three entities is Canada Life Place, Potters Bar, Hertfordshire EN6 5BA. Canada Life Asset Management Limited is authorised and regulated by the Financial Conduct Authority. Canada Life Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.

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