Having an element of top-down analysis, a ‘big picture' view of the global economy and of how asset classes react in it, will be crucial to investing funds successfully over the coming years.
It has therefore been crucial for multi-asset allocators to look not only to pick the right individual managers, but also just as carefully to look at what factors are driving the markets at which point in the business cycle.
Hoppe says: “At FTMAS we are trying to see which part of the business cycle we are in, and then to match that with certain strategies that do better at those times. We look at asset allocation first, then manager selection as a means to implement our asset allocation views, although fund selection is very important, too.
“We are not trying to find ‘all-weather’ managers. There are only a few bottom-up managers whom you could describe as ‘all weather’. We try to find managers who are able to add value over the complete business cycle, but realistically there are certain strategies that do better at certain stages of the cycle.
“But we always need to have a well diversified portfolio – [multi-asset management] is about making relative bets and tilting the portfolio towards the current environment, and how we think that environment will develop.”
So at present, for example, the equities exposure of FTMAs’s products generally tilt towards growth shares. “In this environment of very low economic growth, we believe that companies that can increase their earnings or market share will do better than the general market – so we select managers with a ‘quality growth’ bias.”
However, there is also allocation to deep value- and distressed managers, to profit if difficult business conditions cause financial distress in the real economy.
By comparison, Franklin Templeton’s multi-asset strategies currently have very low exposure, typically below 1%, to European banks. It is a sector facing numerous headwinds.
In late November Hoppe said: “One of the European equity funds we have will, by its investment process, have low or no exposure to European banks. We know it will underperform if the sector rallies, but we used it because we were convinced markets would get more volatile. When all strategies lost money over the last couple of months this strategy significantly outperformed the overall market, because of its underweight in banks.”
Since October, Hoppe and his team also started increasing risk selectively in the portfolios – first via high yield managers.
This is because, looking through the immediate gloom and pessimism, they see signs of better days ahead.
Hoppe explains: “Particularly in the US, leading indicators are improving. They have been doing so since June, though at the same time we also see that economic analysts are very pessimistic. But current data is coming in much better than expectations. That is an environment in which our tactical asset allocation can make lot of sense.”