Last year, it took a deft hand from asset allocators. They had to make sure their clients didn’t feel the full force of the market downturn, while participating in the market upturn when it did. However, they also needed to be nimble enough to move the portfolio to more economically sensitive areas in order to participate in the stimulus trade from November.
Waverton’s multi-asset team had strategies in place to manage each item. James Mee (pictured), lead fund manager of Waverton Multi-Asset Income and fund manager of the wider multi-asset team, says the group’s first line of defense was an allocation to an internally managed strategy, designed to provide a solid return when equity markets are weak. This hedging strategy performed as expected, appreciating significantly as equity markets fell.
The team also wrote put options on the iTraxx Crossover Index, which was trading at historically low levels. They also reduced their equity weighting slightly, from around 48% to 42% in the group’s Waverton Multi-Asset Income Fund. This pushed the cash position higher.
Solve the puzzle
This completed the first task of ensuring that investors did not take the full force of the downturn. It also meant they had cash on the sidelines to start reallocating it to the market when valuations looked attractive enough. They started doing it on March 20. The final piece of the puzzle – participating in the massive market rotation – comes from the group’s bottom-up research.
“We don’t make big calls for asset allocation,” says Mee. “We wouldn’t watch interest rates go up and say ‘we should invest in cyclicals’, for example. However, in reality, it was our bottom-up research that led us to the first signs of a rotation. By the time the rotation started in earnest, we were already moving from a long duration to more pro-cyclical areas. »
For Waverton, this is true multi-asset investing, incorporating sophisticated use of alternative and hedging strategies to achieve client objectives in different environments. The approach is fully global, diversified across regions, asset classes and currencies, with the key objective of “compounding returns throughout the cycle”.
The funds are invested approximately 90% in individual securities among equities, fixed income securities and alternatives. “It allows us a lot more control and gives us the ability to control the allocation when we want to play a particular theme,” says Mee. “For example, we had about a third of our exposure in the ‘reopening’ trade. We wouldn’t have the ability to do that using a passive strategy.
There is a range of funds built from the multi-asset process alongside multi-asset income. The group also has Portfolio, Real Assets and Absolute Return funds. The group also runs an on-platform model portfolio service with five investment options, all with a CPI-plus objective over specific time horizons, as well as a managed portfolio service and bespoke portfolios.
Although some of their portfolios have volatility targets, this is not Waverton’s primary focus when it comes to considering risk. According to Mee, for them, it is far more important that a portfolio outperforms inflation. This means investing in stocks and real assets.
The second key risk is drawdown, defined as a permanent loss of capital. Mee believes that real capital value growth over the long term requires that portfolios do not suffer large losses at any point in the market cycle.
“While some protection is provided by investing in best-in-class companies, and more through our allocation to absolute return alternatives, the importance of hedging portfolios against the most deleterious outcomes cannot be overstated. By protecting against downside risk, we are able to smooth the return profile over the cycle and allow portfolios to compound from a higher base.
For the equity part, the group is looking for sustainable activities focused on the generation of free cash flow. These businesses accumulate over time, using sustainable competitive advantages to deliver high and/or growing returns. In the Multi-Asset Income Fund, this includes companies such as Coca-Cola, Deutsche Post or CME Group. The equities team organizes approximately 1,000 meetings per year.
The group has also sought to develop its expertise in alternatives over the past decade, particularly in areas such as real estate, infrastructure and commodities. Mee says they see it as an important differentiator, capturing new risk premiums, such as liquidity or complexity. The multi-asset team divides its alternative allocation into real assets (seeking yield) and absolute return (capital protection).
The ability to manage hedging strategies and alternatives alongside conventional stocks and bonds requires a team with some depth. The investment team currently has 22 people and the multi-asset team has 10 – with specialists in equities, alternatives, fixed income and multi-assets. The equities team is divided into regional responsibilities.
The final element is asset allocation. Mee says they don’t aim to shift asset allocation significantly, believing that “the world is far too complex to predict.” As such, they work within an established macroeconomic framework.
“Officially, we have an asset allocation meeting every six weeks. The asset allocation committee is thinking about how we can adjust the construction of the portfolio. That said, we have very short lines of communication , with most of us sitting on the same floor, we tend to walk around and have a conversation when we think things need to change.
feel the strength
Today, the focus is on inflation and its structural or cyclical character. There are still secular disinflationary forces, including debt, demographics and digitalization. China’s working-age population peaked last year, for example. However, globalization, once a deflationary force, can now become inflationary. Mee points out that there has been a relocation of supply chains as countries and companies seek to ensure continuity and reliability of supply. This could increase prices. Likewise, he says, investors should be aware of the inflationary impact of a potential change in tax rates.
“Tax rates have come down since the pre-Reagan/Thatcher era, but we are now looking at a global minimum tax rate. While disinflationary forces remain dominant, there are some changes.
In the short term, however, inflationary pressures are expected to continue. There are bottlenecks in areas such as raw materials and semiconductors. Strong consumer demand is colliding with limited supply and driving up prices.
“It should be transient,” Mee says. “I think the opportunity is to trade against this. Current market expectations are for inflation to trend towards 2% by the end of this year. Next year there should be less cyclical inflationary pressures There are currently 3.5 million more unemployed people in the United States than at the end of 2015. That’s a lot of people coming back into the workforce.
This should be disinflationary. The group’s portfolios are generally short-lived in their exposure to fixed income securities. Mee says that with interest rates still low, it will continue to be difficult for bonds. Likewise, he saw some of the diversification benefits of government bonds versus equities diminish as inflation fears mounted. They currently represent only 20% of the Multi-Asset Income Fund.
“We don’t need to be bullish on inflation and rates to see that the outlook for bonds is bad. Even if inflation were to remain subdued and the US, UK and Europe would all follow in Japan’s footsteps “lower for longer”, the bond math implies a lower bond class total return. assets.
The group maintains a significant weighting in equities. Multi-Asset Income is in the Mixed Investment 20-60% Shares sector and currently has a 54% equity weighting. This is basically focused on reopening trade, where Mee continues to see value.
The portfolios also have a significant weighting in alternatives, around 20% for the Multi-Asset Income Fund. This provides diversification and inflation protection and includes holdings such as the GCP Asset Backed Income infrastructure group. The group also continues to hedge against a “doomsday” scenario where stocks and bonds fall in tandem.
The performance of Multi-Asset Income was solid. After a difficult 2018, the fund significantly outperformed its benchmark (CPI + 2.5%) in 2019 and 2020, leaving it in the first quartile of its sector over three and five years.
If 2020 required a deft hand, navigating the post-pandemic era will likely also require an agile approach. Waverton’s approach is multi-asset in its truest sense, making full use of a broad toolkit to ensure consistent returns over the long term.