Last night, US equity markets fell sharply. This, as we write, is spilling over into other markets. As usual falling prices generate uncertainty in the minds of investors.
Before last night’s falls, US equities had risen this year by 9.5%, so, one might argue, prices advanced too far and too fast in response to improvements in economic growth. That said, this year, and indeed looking forward, the landscape is shifting.
So, what is going on? Across investment markets in 2018, despite economies doing very well there have been many significant and divisive events to contemplate, all carrying different risks. Trade wars, tighter monetary policy in the US, Brexit, Italian politics, China slowing economically and problems in Turkey, Venezuela and Argentina, to name a few.
Our manager partners must navigate all these risks on behalf of investors and, importantly, look for opportunities as they arise.
This year they have been very active. They have in aggregate increased hedging against the possibility of sterling appreciating.
Several managers have shortened their bond portfolio durations. This protects investors from rising bond yields underway in the US treasury market. Another tactic deployed is shifting exposure in terms of credit quality. Those managers owning corporate debt have been selling lower quality companies and buying better quality ones which is a smart move at a time when credit spreads have widened.
Across our portfolios we also talk a lot about different styles which, like asset markets, go in and out of favour. One of the biggest style differences is between ‘value’ and ‘growth’. In simple terms disliked v highly prized represents a reasonable stab at a layman’s description; telecoms and utility companies being an example of the former and technology the latter.
We have a blend of both of these styles but across our manager range there is a greater orientation to value. We believe this will be important because the relative valuation gap between value stocks and growth stocks is now at peak levels. Indeed, one of our growth managers has recently been adding to value stocks. We are not 100% certain but it is possible that a rotation away from growth is underway. Time will tell and even if now is not the time we have other styles in the mix that help- minimum volatility, stability focused to name a few.
Finally, our portfolio managers hold a proportion of our funds in cash. This is held as a counterbalance during rocky periods and is available to deploy at opportune times.
There are various factors that impact multi-asset portfolios over time. We contend that having a balance of return drivers and differing investment styles actively supports investors to step through challenges when they occur. Adding new money when conditions are more challenging is sensible. The diversification benefits our portfolios provide mitigate downside risk and having uncorrelated assets that offset each other will cushion the effect of market turbulence. Over time investors adding new money and staying invested in productive, risk assets benefit when market prices recover. In the long run this considered approach helps preserve and grow wealth.