Are you wanting to invest offshore but wondering how best to go about it when traditional global asset classes look fully priced and many risks dominate the news flow? We believe maintaining a well-diversified portfolio that comprises more than just one asset class is the most appropriate way to navigate a challenging investment environment.
Here’s what you need to consider about the current environment:
Pressures are building in the current backdrop
Most developed market economies are in the midst of a robust economic recovery that has provided tailwinds for equity markets and raised the prospect of higher global inflation.
The two factors driving these recoveries are the amount of stimulus injected into these economies and the progress these countries have made in vaccinating their populations.
Savings rates are up, balance sheets are in good shape, interest rates remain low and economic lockdowns over the past year have meant significant pent-up demand is waiting to be fulfilled as conditions improve. Against this backdrop, it’s not surprising that inflationary pressures are building up.
Diversification as antidote to inflation and other risks
Very few assets respond well to unanticipated inflation risk. The key consideration for investors is whether the inflation we are seeing will prove transitory - a result of significant demand increases meeting supply constraints that have appeared as economies are opening up again - or more durable - taking us back to an era of high inflation reminiscent of the 1970s.
Inflation risk, and other risks that may well appear as we move towards a post-pandemic world, can be alleviated through diversification across asset classes in an actively managed multi-asset portfolio.
One risk already present, especially in the US, is that equity markets are looking quite fully priced after a record run since the market meltdown in March last year. Recent increases in equities were fuelled by economic data that surprised on the upside as the post-pandemic recovery in developed markets were more rapid than anticipated.
During the first half of 2021, global equity markets, as measured by the MSCI World Index, returned 13% in US dollars. Over the last five years, the same index returned 15% p.a. and over the past 10 years, close to 11% p.a. This compares to average returns of between 7% and 9% since the beginning of the 20th century. It’s clear that the stock market’s recent experience has been much more favourable than historically, and thus we believe it is reasonable to expect lower returns over the next several years.
A better forward-looking strategy
Against this backdrop, we believe alpha-generation and selectively identifying attractively priced shares, in addition to diversification into other asset classes, will be a better forward-looking strategy than just owning the index. Our multi-asset class portfolios typically have exposure to 40 – 60 shares, carefully selected out of a universe of 2 500 – 3 500, which means they don’t look anything like the index or our peers. This level of diversification is hard to replicate on an individual basis.
Our multi-asset class funds are further differentiated in that we hold many investment opportunities outside the traditional 60% equity/40% bonds multi-asset portfolio. Thus, while we continue to believe that it’s essential to have exposure to equities, we believe it is also important to include other assets, such as infrastructure, high yield income, global property and absolute return investments, in our multi-asset class funds. This is especially important in an environment where, in our view, the global bond index as a whole offers a negative real return over the next several years.
Infrastructure investments, which we access through listed assets that have concessions to operate toll roads, bridges, tunnels, and airports, typically offer highly durable and predictable investment outcomes. They also generate income streams linked to inflation, providing protection against inflation shocks.
We are taking advantage of attractive opportunities in German residential, Indian office and Australian freehold properties within the real estate sector. These are all property categories less affected by a shift from physical to online retail and towards increased homeworking. We also like selected convertible bonds, which combine bond and equity characteristics that, in our view, offer a better risk-reward profile than the ordinary equities issued by the same entities.
Each of our global multi-asset class funds benefits from exposure to these non-traditional assets, with the extent of their exposure in the portfolios dependent on the risk budget of the fund. This ranges from around 30% in the Global Capital Plus Fund, with a cautious risk profile, to 25% in the Coronation Global Managed Fund, a moderate risk balanced fund, and around 15% in the more aggressive Global Optimum Growth. The same funds have effective equity exposure of 28%, 55% and 80% respectively, with the balance held in cash and selected fixed income instruments.
Building well-diversified portfolios
Building portfolios that span six asset classes and look nothing like the index takes extensive research and a significant amount of investment experience and expertise. Our Developed and Global Emerging Markets teams, responsible for managing Coronation’s range of global multi-asset class funds, are significantly resourced.
Together there are 19 investment professionals involved in research, portfolio construction and fund management across both teams. The teams consist of a blend of more experienced members that have been managing money for decades, combined with the fresh insights and alternative perspectives that younger analysts bring to the table.
The two teams operate as an integrated unit, with members constantly interacting and sharing investment research responsibility across industries and geographies.
They also have the support of the Fixed Income, South African Equity, and Frontier Markets teams as well as our ESG and macro analysts.
It is the combination of this expertise and our robust and tried and tested investment approach that enables our multi-asset class funds to provide investors with exposure to a wealth of opportunities in traditional and non-traditional asset classes, actively balancing risk and returns to deliver on our investors’ various objectives across the fund range.
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