Will multi-asset funds learn from macro call flaws?
Macro event risk is always evident in markets. We have witnessed some notable occurrences over the past year, with the unexpected Brexit victory in the UK and Donald Trump’s startling win in the US presidential election.
Although these moments can have significant near-term impacts on markets, it is an extremely risky strategy to try and position a portfolio in anticipation of any single scenario. Making major asset allocation decisions based on macro calls of well analysed events has repeatedly proven to be a difficult investment strategy.
Many multi-asset strategies, which are supposed to offer sufficient diversification characteristics to withstand these macro events, suffered strong downside in the immediate aftermath of these events over the past year. This was largely due to the reliance of many strategies in making the correct macro call, which was compounded by the absence of true diversification.
Unfortunately, Brexit and Trump were not isolated incidents. The past two years have been rife with event risk. This was clearly on show during the summer of 2015 – which was highlighted by the fears surrounding Greece and the China hard landing scare. Again, many participants within the multi-asset universe could not provide the much-needed and often-promised true diversification for capital protection.
Why are we speaking about this now? Well, the next event risk on the horizon is this week’s UK General Election. Many investors will not be able to avoid the temptation to position in favour of an expected result or hedging portfolios excessively. However, as was witnessed last year, this is a dangerous game to play – as polls, and bookmakers alike, can often be wrong. Even with the result known, market direction is difficult to predict.
While Prime Minister Theresa May’s Conservative Party is still narrowly ahead in most recent polls, a lot can change. Therefore, in our opinion, investors simply do not need to take this risk.
We try to do things differently at Nordea. Our Multi Assets Team decided a decade ago to shift our investment focus away from asset class investing – such as top down or directional where a single beta dominates the portfolio too much.
Our focus is on risk premia and their diversification ability. Asset classes can include several risk premia exhibiting significantly different characteristics over time, and by separating these we are able to run a much more robust correlation analysis. This has allowed our Multi Assets Team to navigate through periods of severe market dislocation – as we witnessed during the period following the unexpected Brexit vote. In our opinion, investors look to multi-asset funds for consistent returns through a cycle, as well as the ability to protect precious downside – something we try to attain by risk-off return drivers providing true diversification.
Volatility and event risk have always been and will continue to be a feature of investment markets. We believe an important role of multi-asset managers is the ability to keep diversification intact. This is not simply about piling into numerous asset classes, but rather the identification of a select number truly uncorrelated positions able to deliver for investors through most market environments.
Asbjørn Trolle Hansen, manager of the Multi Assets Team