Dynamic approach to allocation required, says ING AM’s Ewout van Schaick

A dynamic approach to asset allocation is needed to weather the uncertain environment, says Ewout van Schaick, head of portfolio management, strategy & asset allocation at ING Investment Management.

Investing in today’s markets is challenging but also offers opportunities. If markets are pricing fundamentals – like the business cycle, inflation and corporate earnings – correctly, money can be made by forecasting their direction better than others.

However, while superior forecasting is necessary, it is not sufficient to outperform the market. If there is herd behaviour, risk aversion or big changes in the dominance of market players, flexibility is required. This calls for a dynamic approach to asset allocation to weather the increasingly uncertain environment.

The recent volatility in risky assets serves as a reminder that financial market sentiment remains more fragile and receptive to negative news. The underlying reason is probably that the combination of the Lehman crisis in 2008 and the euro crisis that started last year, and still lingers, has given a structural blow to investor confidence.

The world is no longer the safe place and we have to get used to lower nominal economic growth that is more susceptible to shocks. Furthermore, the ability and willingness of policymakers to mitigate these effects is more limited than before the crisis.

So far, our asset allocation decisions in 2012 show some resemblance to 2011, holding fundamentally-driven overweight positions in equities, real estate, commodities and the higher yielding segments of fixed income markets during the first few months of the year. Just like 2011, we became more risk averse in the second quarter when we reduced our positions in all risky assets.

Outside the eurozone, the global recovery is still progressing but we feel the uncertainty over both cyclical and political trends in Europe will weigh more strongly on markets in the near term. Once visibility on this front increases, we will consider increasing our allocations to risky assets again.

Many investors reduced allocation to US, UK and German government bonds due to their very low yields. We have not done so and still prefer to hold on to them. We expect treasuries to benefit from tail risk hedging flows but also see increasing support for treasuries in current investor behaviour.

Investor confidence continues to decline and momentum and investor flows remain supportive. Obviously, the valuation of government bonds is less supportive, but that remains more a medium-term issue than a good short-term indicator.

So far, our dynamic approach served us well. However, we feel we must remain on guard, continuously assessing an environment that is fascinating and confusing but offers attractive investment opportunities for investors able to adapt.  

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