Strategic income is a multi asset strategy with a difference. Here, investment manager, Andy Wong, explains how the application of a total portflio approach represents the evolution of multi asset strategies.
Q: Tell us the strategic income approach.
A: Strategic income represents a new approach to multi asset investing. It aims to generate equity-like returns with less risk by identifying economic, technological, social and geopolitical themes and how they affect asset prices, while at the same time maintaining a pool of secure, income generating securities. These themes can be secular, which is to say they play out over long periods, or cyclical, driven by shorter-term forces. This results in a barbell approach to investing: safe assets on one end and relatively concentrated positions in powerful market drivers at the other.
Q: What is your investment philosophy?
A: We’re unusual in that we take a holistic and dynamic approach to asset allocation. That involves an interplay between our bottom up and top down analysis – each can affect the other. For instance, we will analyse a company’s performance and then see how it squares with industry or macro-economic trends. Sometimes the company level information will lead us to re-frame what’s happening more generally in the economy. At the same time, we take a total portfolio approach, which involves adjusting the entire portfolio according to the market’s shifting narrative, from allocation to selection, all working together to achieve the portfolio’s goals.
Q: Can you explain more about how bottom-up and top-down work together?
A: Typically, multi-asset managers tend to focus on a top down, macro view of the economy and markets. Adding a bottom up perspective deepens our understanding of how the investment landscape is likely to evolve. At the same time, our flexible investment guidelines allows the strategy to be very agile in how it responds to shifts in the market.
As an example, by the summer of 2025 investors had started to worry about labour market developments in the US. Payroll numbers were softer than expected, suggesting a sharply slowing economy. But at the same time, this macro picture didn’t quite square with what was happening within individual companies, particularly in the tech sector. Our bottom-up findings made us ask questions about the consensus top-down views.
Yes, they'd started trimming staff, but that was because they were investing heavily in artificial intelligence. Advances in tech productivity suggest that we might be at a secular turning point and therefore that there’s a disconnect between the payroll numbers and company results. To us, what companies are doing indicates that there's something else going on in the labour market, down to structural changes associated with the adoption of this new technology.
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With the total portfolio approach, allocation and selection decisions are considered in the aggregate. Asset class silos are broken down.
Q: You emphasise the total portfolio approach. Why is it important?
A: With the total portfolio approach, allocation and selection decisions are considered in the aggregate. Asset class silos are broken down. All assets compete for the risk budget and are considered in light of each other. This helps avoid the misalignment engendered by the more rigid approaches taken by traditional strategic asset allocation. We have risk, return and liquidity budgets for our portfolio. Any change to a market position – buying or selling a new stock or credit or bond – will be done in the context of those budgets.
For instance, if we add a US tech company we also consider its component manufacturers in Taiwan and Korea. Because we think the dollar is in a secular downtrend, this could represent some diversification away from the US currency even though it's a US company. But then we might also need to increase our allocation to gold to balance the additional risk.
Some of the very biggest pension funds have subscribed to the total portfolio approach, but it’s still a relatively new way of investing.
By contrast, multi-asset strategies generally tend still to be based on strategic asset allocation approaches. Here portfolios are balanced according to asset class rather than individual assets. It also tends to be a top-down, siloed approach to asset classes. Taking a top-down view makes them overly reliant on backward looking data, potentially missing crucial information about what’s happening in the world now and where that’s likely to lead. At the same time, viewing each asset class distinctly misses the fact that some of these bottom up trends will have impacts across asset classes.
Q: Can you give an example of how that’s applied within strategic income?
A: Take 2020, the year of the Covid lockdowns. Early on we saw that the pandemic would cause investors to flee risk and seek liquidity. So we bought US Treasury bonds. But then it became apparent that a US dollar shortage was developing, that Treasury bonds were no longer the optimal safe instrument in this environment and that, instead, investors were going to be desperate for cash. So we increased our cash position to 24% of the total portfolio at one point. Even if you got the first part of that right, you might not have got the second part.
By late March, global central banks reacted to this US dollar shortage and provided liquidity. While at that point we had no idea about vaccines or how the pandemic would develop, we believed capital markets could stage a V-shaped rebound even if economies were struggling through a U- or L-shaped recovery. The rationale was that the cause of market capitulation – the dollar shortage and a general dash for cash – had been directly addressed. As a result, we shifted to a risk-on position, given the top-down signals.
Meanwhile, from the bottom-up perspective, we saw ecommerce and communication technology making huge gains as they made 3 years worth of growth/market penetration in 3 months. So while our overall allocation had turned risk on, our selection was focused on tech and other trends that were accelerated by the pandemic.
Our approach was guided by our overall liquidity and risk considerations. Shifts in market risk led us in one direction, then the drop in liquidity and then, finally once the liquidity backdrop was resolved, we could again focus on risk and return.
Q: What sort of themes are you focusing on now?
A: The market typically can’t focus on more than two or three things at any one time. And we’re similar. We prioritise and order themes. Some are long-term secular forces, such as the growth of AI or the shift in the geopolitical order away from the US; some are cyclical, such as the copper shortage.
The short-term themes can vary from one month to the next, even week to week. We try to stay on top of those, but we always have our eyes on the secular developments, too.
We believe the advancement of tech and AI is a big moment for humanity, pushing us from information deficit to knowledge abundance. The impact of this will be bigger than the Internet. At the same time, geopolitics will increasingly take centre stage. The world order since the end of the Second World War is changing. These secular themes are intertwined and converging (see our Secular Outlook for more of our long-term thinking.)
In light of this, we are overweight tech, computing power, electrification, and the related supply chain including in Taiwan and South Korea. National security and defence are also playing an important role in our investment thinking.
On the cyclical side, we find opportunities in Japan’s economic recovery, particularly among corporates. As for Hong Kong and China, there may be an asset allocation shift: from a focus on deposits and bonds, to allocating more to equities and risk assets.
We also think there is a need for new store of value. As the US dollar weakens and trust in global government bonds wavers, we find gold an alternative store of values for balance and stability.
In a nutshell
Strategic income represents an evolution from traditional multi-asset approaches. It’s a strategy that should benefit a full spectrum of investors – from retail to institutional. Retail investors typically don’t have the means to construct multi-asset portfolios that effectively and efficiently balance risk and return criteria. But at the same time, few institutional investors – even those that have their own in-house multi-asset capabilities – have adopted the total portfolio approach (TPA). For them, it would be useful to have a TPA-based touchstone like strategic income within their total allocation, both as a reference and as an introduction to this new technique – not to mention as a quality source of risk-adjusted return.
