Multi Asset Q4 investment update

As with any investment, your capital is at risk. Past performance is not a guide to future returns.

Steven Milne (SM): Hi and welcome to this Multi Asset quarterly update. I'm Steven Milne and I'm an investment specialist with the Multi Asset client team. By way of a reminder, the Multi Asset strategies seek to achieve 3.5% over the relevant base rate, dampening those volatility of returns below 10% and providing that all-important portfolio diversification by investing across a wide range of different asset classes.

Today we're going to be discussing performance. We're also going to be touching on our updated macro view as it's evolved over the quarter. And stay tuned, finally, for our update on where we're going to be finding those future portfolio returns.

I'm delighted to say that I'm joined today by Nicoleta Dumitru. She's an investment manager and one of the key decision makers on the strategy. Nicoleta, welcome.

Nicoleta Dumitru (ND): Hi, everyone.

SM: I think we'll start with performance, if I may. Quarterly performance was around about negative 2% for Q4, around about plus 6% for the year, but perhaps you can touch on some of the main drivers to that over the quarter.

ND: There were many things that happened over the quarter. The most important one for the portfolios is the fact that the US 10-year yield moved higher by almost 1% or 100 basis points. Over the course of three months, that is a sharp move. And so that has put pressure on the rate-sensitive holdings in the portfolios and has delivered that minus 2% return that you mentioned just there.

The most important thing to note is that the portfolios have reacted to that move higher in yields, but also this is in contrast to what happened in the previous quarter, when yields were falling and the portfolios delivered a solid return. And so, it's that asymmetric duration exposure that we're pleased to have seen come through in the portfolios.

SM: So we're saying that the portfolio is less sensitive to rising yields. Perhaps you can touch on why that actually is.

ND: Sure. A few things to mention there. The fact that not all of the government bond positions have been detracting. We have been owning a short Japanese rates exposure and a short Chinese currency investment, and those have been contributing positively to returns.

At the same time, other asset classes like structured finance or credit more generally have been helping to dampen some of the pressure from rising yields. Importantly, we have also taken deliberate actions throughout the quarter to reduce that duration sensitivity in the portfolios. We have sold the long US treasuries and 30-year Australian bond positions. And we have also been trimming the emerging market government debt exposure.

SM: So, the active reduction in interest rate sensitive assets does point to the macro view that I was talking about before and the evolution of that over the quarter. Perhaps you can describe the evolution of that, how the view has changed and the effect on the portfolios as well.

ND: You are absolutely right. The macro view has been changing, not just for us, the portfolio managers in the Multi Asset team, but also for the Global Bond team that informs our macro view. And what has happened is that in the US economy, and this is the market that drives all asset markets, the evidence for inflation moving closer to target is not quite coming through as we expected and as the markets were expecting.

And so we have had a change of view on that. We now expect inflation to take longer to get closer to the central bank target of 2%. There are a few reasons for that. The services inflation has been taking longer to cool down. The deflationary environment in the goods inflation is starting to stall. Labour markets are remaining tight. And importantly, growth is remaining robust, and that is putting pressure on inflation. This is not to say that we think inflation is going to reaccelerate from here, but it will take longer to get closer to that magic 2% number.

SM: I think as well when we're thinking about inflation, just sticking with that for just a second, we obviously had the US election just recently. Some of the policies within that seem to be inflationary. Are you in agreeance with that? Do you think some of the policies will turn out to be quite inflationary for the US economy?

ND: Sure. It is important to say that right now we're mostly counting on the rhetoric. It is yet to be seen what will happen, but certainly you are right. The net impact of the proposed policies or the ones that have been talked about in the media would suggest that inflation will continue to be sticky as a result of those policies.

A few things to mention there are the fact that Trump is looking to enact some pro-growth policies, like the reduction in corporate taxes or deregulation. And, also, there is talk of immigration policy being tighter and, also, tariffs that could potentially put a floor under the inflation number.

SM: Okay, so as per usual, the inflation picture is never particularly linear, especially when it's come back down to its 2%. But I think just changing tact very slightly at the moment, if we can come back to something you mentioned before about portfolio transactions, perhaps you can discuss exactly what asset allocation changes have been made to the portfolios over the quarter.

ND: I would preface everything by saying that we have made quite a few changes in the portfolio. This is not a usual time period. As I was mentioning, we have changed our macro view. And it is important that we are dynamic in positioning the portfolios such that they can benefit from the likely environment from here.

We have changed our views and therefore we have made changes in accordance to that. So, we have reduced the government bond duration in the portfolios, as I was saying earlier. So that has included the complete sale of US treasuries and Australian government bonds. We have trimmed the emerging market debt exposure. We have also reduced the property exposure.

On the other side, we have been adding to assets like equities, economic infrastructure, and structured finance that we think are better placed to handle a higher-for-longer yield environment.

I suppose the net effect of all of that, which is the most important thing, is that the portfolio's risk shape and the portfolio predicted volatility hasn't actually changed that much. It is still something around 7%.

For example, we have added to equities, but on the other hand, we have reduced property, which is a high-beta equity market. At the same time, we have a 10% cash position in the portfolios, and that is helping to introduce more protection in the portfolios if needed. We have closed the VIX position that was roughly 2% in the portfolios, broken even on that effectively.

And in turn, we have increased CDS protection in the portfolios, the credit default swap protection, from 5% previously to 10%. And we think that will be better placed to offer protection in the portfolios. And it is a more efficient way from a cost perspective to add some protection to the portfolios.

SM: So, obviously, still having protection within the portfolios from what you've just said. But coming back to the listed equities point, I think looking back over the rest of 2024 prior to Q4, we haven't really been adding significantly to equities over that time period. So, with market chatter being markets are expensive at the moment, why is now the right time to be adding to our equity positions?

ND: That is a very good observation. We still have that modest view on equities over the long term. But it is important to know that on a one- or two-year time frame, starting valuations are not the biggest driver of equity returns. And, in fact, we're seeing a number of near-term catalysts, like the continuation of the AI-driven productivity growth, as well as the pro-business, pro-growth environment that Trump is trying to enact, or at least is aiming to do so. We think all of that will be supportive for equities and will be helping earnings growth, and corporate margins to increase from here.

So what we have done is that we have added to the Baillie Gifford Long Term Global Growth Fund, we have initiated a new position in the American Fund, and we have also topped up the Systematic Value Fund. All in all, this has resulted in a 5% increase in the equity exposure to a total of roughly 20%.

SM: Okay, so adding to a sort of broad church, as it were, of equity allocations and not just to the growth angle.

Conscious of time, I did want to ask a final question, as promised at the start. I did want to discuss the future drivers to portfolio returns. So perhaps you can discuss that and what asset classes you think are going to be driving this in future.

ND: So looking forward, we expect returns to be delivered by a mix of the more growth-oriented asset classes, like equities and structured finance, as well as the more diversifying assets, like core infrastructure and insurance-linked securities.

We expect this portfolio to deliver upside in a stronger growth environment, but we also believe there is an appropriate level of diversification such that the portfolio can handle a different scenario that might come through.

As I was mentioning earlier, there is a good level of protection in the strategies and we are confident that we can deliver on the targets that we have set for ourselves and that our clients are expecting from us

SM: Excellent. Well, thank you very much. Sadly, we have run out of time for today. Thank you for joining us, and we hope to speak to you again soon.

Annual past performance to 31 December each year (net%)

Annualised returns to 31 December 2024 (net%)

Base rate: UK Bank of England.

Source: Revolution. Sterling. Returns have been calculated by reducing the gross return by the highest annual management fee for the composite. 1 year figures are not annualised.

Past performance is not a guide to future returns.

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