Doubts rise over balanced portfolios

In a year where bonds and equities traded in tandem at record valuations, doubts continue to rise over an old rule that balanced portfolios must comprise 60 per cent stocks and 40 per cent bonds.

Investors have intensified their hunt for other ways to diversify their wealth, be it in less-volatile private assets, or hedge funds and factor investing strategies that are becoming more accessible.

Said Todd Youngberg, a veteran bond fund manager who is now senior client investment strategist at Aviva Investors: "Stocks and bonds have rallied together, we were seeing signs they were selling together. Multi-assets had a good performance but we want to be proactive if there is a selloff in the bond market."

Tang Hsiao Ching, head of advisory and sales of managed investments at Bank of Singapore, said the private bank has received two to three times more interest than it can handle for an emerging markets high yield fund launched in recent months.

 It had to cap the fund as there were not enough bonds to buy.

But with buoyant valuations and high correlations between stocks and bonds, sophisticated investors are grasping for ideas, she said. "Everyone is wondering when the music is going to stop."

Peter Harrison, group chief executive of British asset management giant Schroders, told journalists in London last Thursday that the search for risk diversification is a key trend shaping the investment landscape.

In the last 10 years, equities and bonds have both performed, and balanced portfolios benefited tremendously from being correlated with each other, he said.

"Bonds globally could be quite a risky asset. What you do with your wealth in that environment is very important," he said.

There is a real opportunity in private markets, he said. "On the pension fund side, people don't want the volatility of public markets."

Simon Coxeter, a principal at Mercer Investment Solutions who is responsible for the consultant's multi-asset coverage in the region, said that while traditional 60:40 "core" multi-asset funds have done well this year, he does not like them looking ahead.

He prefers what Mercer classifies as "idiosyncratic" multi-asset funds which pursue hedge fund-like strategies.

These funds are still typically liquid and charge annual fees of one per cent and below, he said.

An example of an idiosyncratic strategy is a long-short fund, which holds stocks with the hope of gaining from prices going up, while selling other borrowed stocks, or shorting, with the hope of prices going down. 

But Mr Coxeter said there is a significant disparity in how these funds perform, so one has to select a manager carefully. 

The median idiosyncratic fund has underperformed this year except during the first two volatile months, where they lost money but not as much as others, he said.

Another challenge is trying to tell an actual idiosyncratic fund apart from a core multi-asset fund which puts a "marketing gloss" on how it is mitigating the downside, or is trying to achieve an absolute return above an interest rate benchmark, he said.

Multi-asset fund managers argue that they remain relevant looking ahead.

Despite higher correlations between both bonds and equities, diversification can still be achieved by other means, they say.

Vincent Chan, Schroders' head of multi-asset product strategy for Asia, said managers can tap on factor investing ideas.

These "more refined risk premia" include "value versus growth, small caps in equities and credit, high yield, emerging markets local or hard currency within fixed income".

Multi-asset funds are also relevant because investors can access alternative asset classes like infrastructure and commodities through them, he said.

Similarly, a Standard Life Investments spokeswoman said multi-asset strategies can benefit from "views and positions on interest rates, currencies, volatility and inflation". 

What is important is having a rigorous risk management approach where no one particular risk, or group of risks stand out, she said.

Those who advise wealthy clients like Tan Wei Mei, head of portfolio solutions at Credit Suisse Private Banking Asia Pacific, said that multi-asset fund managers can still add value from the asset, geographical and sector points of view, to provide risk-adjusted returns.

"As an example of how divergence is still observed, European equities have underperformed other regions year-to-date," she said.

This article was first published on November 21, 2016.
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