Decade of multi asset investment

We launched our dynamic multi asset strategy a decade ago against a tumultuous macroeconomic backdrop. At the time, the economy was undergoing seismic shifts in the wake of the Global Financial Crisis of 2008. Central banks worldwide were stuck pursuing near-zero interest rate policies, while the US shale oil boom had led to a halving of the oil price despite the political uncertainty in the Middle East sparked by the rise of ISIS. Meanwhile, the BRICS nations had gone from “hero to zero”. The annexation of Crimea by Russia had prompted widespread condemnation and the implementation of sanctions on Moscow from the West, while China was experiencing a prolonged economic slowdown that was resonating across the world, impacting other economies and asset markets.

Much has changed since then, but the world is no more stable. The after-effects of a global pandemic, conflict and political upheaval are among the challenges facing both developed and emerging economies. The UK, for example, is now firmly out of the European Union while Donald Trump has secured his second term as US president.

At first glance, financial markets seem to have taken these events in their stride. Global equities are up by some 180% over the past 10 years. But those gains mask a great deal of turbulence, with average annualised volatility of over 13%.MSCI ACWI total return in local currency terms

It has been a volatile time for asset classes. But that volatility needn't be problematic if investors adopt the right approach. By deploying tactical allocation, our multi asset portfolio has delivered consistent returns over the past 10 years and with lower volatility than stocks. In fact, the last decade has reinforced our view that by remaining faithful to our four investment principles (described below) we can continue to perform for our clients.

In 2015, during the oil price crash, market pessimism created a mispricing within US high yield bonds, where fears of debt defaults led to a sharp sell-off, resulting in the asset class trading at an attractive risk premium versus equities – something we felt was not justified by fundamentals (see Fig. 1). Liquidity conditions were favourable due to low interest rates, and sentiment was excessively negative. We therefore raised our exposure to US high yield bonds to the maximum allowable allocation and thus benefitted from the recovery during the following year as high yield bonds outperformed the US equity market.

When it comes to political events, we refrain from forecasting outcomes; instead, we focus on controlling portfolio risk and preparing for any eventuality. To this end, in 2016 ahead of the Brexit referendum, we conducted thorough stress tests on each asset to assess the probable impact of different scenarios. As a result, we reduced our equity exposure to 22%, divesting completely from European equities. We concentrated our asset exposure in the US and Asia, where the potential impact of Brexit would be significantly lower. Additionally, managing the portfolio's currency allocation was critical, given the anticipated volatility in sterling and the euro. Following the event, when equities plummeted by 20%, we capitalised on the dislocation by increasing equity holdings back up towards 40%.

Thematic investing is a strength of Pictet Asset Management, and we proactively and continually draw on this expertise to the benefit of our clients. In recent years, for example, we embraced AI-driven growth opportunities through thematic investments in our dedicated Digital and Robotics strategies. We also look for instances where thematic strategies can help us to tap into broader macroeconomic trends.

During 2020, in the wake of the Covid-19 pandemic, governments were deploying extraordinary amounts of fiscal stimulus, largely targeted at consumers, to support the economic recovery. We spotted a thematic opportunity to invest in Pictet’s Premium Brands equity strategy. Companies in this fund benefitted from a luxury consumption boom driven by excess consumer savings, resilient demand from high-end consumers who were less impacted by the pandemic, and a unique cyclical recovery as spending on consumer services (travel/dining out) was still curtailed by the rolling lockdowns. The strong profit margins combined with consumer loyalty in this sector led to an outperformance in the shares of premium brand companies (see Fig. 2), making a positive contribution to our portfolio's returns.

Last but not least, we are not afraid to be contrarian. In 2023, we judged consensus economic forecasts at the time to be overly pessimistic about the risk of recession; we took a contrarian stance, preferring equities over credit, and credit over government bonds. We believed private sector balance sheets were in good shape and that companies' disciplined management of their liabilities were muting the impact of interest rate rises from central banks, while corporate earnings were on the brink of recovery and credit valuations offered elevated carry. Taking such a stance benefited the portfolio.

This principle underpins our portfolio construction, which evolves with each economic cycle. For example, during the 2022 inflation spike, stagflationary conditions justified our exposure to commodities and emerging market local currency bonds, both of which outperformed as central banks in the developing world acted earlier and more decisively than developed market counterparts to tame inflation.

And in a decade marked by greater geopolitical and political challenges, we have consistently worked with our risk managers to stress-test portfolios, ensuring resilience against adverse scenarios.

For instance, during Trump’s 2016 victory, we found that cyclical stocks had sunk to unjustifiably low valuations. We consequently shifted towards industrial and mining stocks, which rallied as the Trump administration focussed on reshoring US manufacturing. 

During this US election campaign, meanwhile, we reduced the portfolio's exposure to European assets in favour of US ones, anticipating heightened structural risks for Europe if Trump pursues protectionist policies which could harm exports from the region. 

Geopolitical risks have also highlighted the value of diversifying assets such as gold, which, supported by robust central bank purchases of the precious metal, has proven resilient since Russia’s invasion of Ukraine, despite high real bond yields and solid growth conditions.

Similarly, in an environment characterised by above trend inflation and spiralling fiscal deficits, we have recognised the importance of managing the portfolio's duration, or its sensitivity to rising interest rates.  Managing interest rate risk and its volatility is a challenge for conventional portfolios, but a potential source of excess return for multi-asset portfolios that pursue a dynamic asset allocation approach, such as ours.

Our experience over the past 10 years has reinforced our commitment to - and belief in - active asset allocation, diligent risk management and precise implementation. We believe that with our consistent approach we can continue to build a portfolio that achieves real returns through time with limited volatility (the fund has a medium-term target of cash plus 4% per annum with less than 75% of equity risk).

The next decade is likely to continue to present as many opportunities as risks, and the current rules based world order will likely be challenged – whether that be by US exceptionalism, the economic impacts of the continued move towards populist politics, or the largest intergenerational wealth transfer we have ever seen. With the ample resources we have to tackle these challenges, we will endeavour to explore and seek to take advantage of the environments ahead on behalf of our clients.