Following the stabilisation of the global economy, Barings' flagship asset allocation product, the Baring Dynamic Asset Allocation (DAA) Fund, increased its risk profile in the final quarter of last year, taking equity holdings up from around 30% at the end of the third quarter of 2012 to 43%.
Following the stabilisation of the global economy, Barings’ flagship asset allocation product, the Baring Dynamic Asset Allocation (DAA) Fund, increased its risk profile in the final quarter of last year, taking equity holdings up from around 30% at the end of the third quarter of 2012 to 43%.
The DAA Fund celebrates its 6th anniversary on 16 January and has reached a record size of over £6bn assets under management.
Positive economic developments in China, the US and the eurozone drive a cautiously optimistic outlook for riskier asset classes such as equities and corporate bonds in 2013, according to Baring Asset Management.
The European Central Bank’s bond buying programme coupled with a more positive outlook for Chinese growth and successful negotiations around the US fiscal cliff suggests that key economic concerns are now slowly being addressed.
The UK was the principal driver of the fund’s returns at the end of 2012 as the UK market rallied strongly. The international equity segment of the portfolio also added value, although performance was impacted by the lack of exposure to strongly performing markets in Asia.
Percival Stanion, head of the Multi-Asset Team at Barings, said: “As we head into 2013, we recognise that many of the external risk factors which have been plaguing markets in recent years are now slowly being addressed. One of the most obvious is the Eurozone debt crisis. In this regard, we have been encouraged by the recent policy moves of the European Central Bank and although the economic data continues to look very poor, the Bank’s bond buying programme has removed an immediate contagion threat.”
Barings believes there seems to be a clearer picture emerging for the Chinese economy in 2013 with improvements in economic data suggesting that the pace of growth in China has now bottomed out. This should present good news given the trajectory of growth in Asia’s largest economy was one of the major uncertainties in 2012.
“We believe growth in China now appears likely to reaccelerate back towards 8%,” said Stanton. “We would be cautious about expecting anything greater than this as it is very likely that the trend growth rate will ease over the next decade as the authorities attempt to rebalance the economy away from exports and towards domestic consumption. However, China will still be growing considerably faster than most other countries and will therefore account for an increasing proportion of global growth.
In the US, the start of 2013 has seen the Senate and the House of Representatives finally reach a deal to avert the fiscal cliff and the automatic introduction of more than $500bn of tax increases and spending cuts to the US economy.
“The announcement that policymakers have avoided pushing the US back into recession is clearly positive news, although economic and political hurdles remain. Indeed, we believe there will now be increasing uncertainty over spending cuts – an area where no agreement has so far been reached between Democrats and Republicans – as we move towards February when the US will once again reach its sovereign debt ceiling.”
In the case of emerging markets, Barings highlights that the recent aversion to the perceived riskier parts of the equity universe means that valuations are particularly attractive. Asian markets finished the year strongly – helped by an improving economic picture in China – and Barings expects emerging equities to perform better in 2013.
In fixed income, Barings is generally positive on corporate bonds, preferring high yield to investment grade corporate credit. High yield continues to be a strongly performing area of the bond universe with encouraging attributes such as low default rates and healthy balance sheets.
“While macroeconomic visibility has improved in recent months, we are mindful that the outlook for the global economy remains somewhat precarious and we therefore maintain some exposure to lower risk assets such as cash and government bonds, with the latter accounting for 12.8% of the portfolio as at the end of 2012,” said Stanton.
The Baring’s DAA Fund has returned 1.3% in sterling terms in Q4 2012, ahead of the investment objective of Libor+4% which equated to 1.2%.
|Q4 2012||6mths||1 year||3 years||5 years|
|Baring Dynamic Asset Allocation Fund||1.3%||3.1%||5.5%||5.7%||6.1%|
(Source: Barings as at 31 December 2012)
Baring Asset Management is part of the US-based MassMutual Financial Group. Massachusetts Mutual Life Insurance Company is one of the largest life insurance businesses in the USA.