Managers of multi-asset funds can employ a wide variety of strategies in an attempt to reach their investment targets and generate returns for their clients.
Some will use a simple blend of equities and bonds, while others, such as Legal & General Investment Management’s (LGIM) head of multi-asset funds John Roe, will use more complex investment strategies to hit their targets.
Below he tells FE Trustnet how he constructs his portfolios using a balance of short-term, medium-term and alternative trades.
Under Roe’s watch as head of multi-asset funds are several portfolios including the five FE Crown-rated L&G Multi-Asset Target Return fund, which has been a strong performer and has achieve its target to make positive returns over a rolling 3-year period.
Since its launch in 2015, the fund has given investors a total return of 12.53 per cent, as the below chart shows.
Performance of fund since launch vs sector
Source: FE Analytics
Roe and the multi-asset team at LGIM think about the portfolio in three ways where the first looks at market risk and plays out on a medium-term basis.
Roe said the trades he carries out here are based around what stage of the economic cycle we are in and how much reward you will get for your risk.
“It’s not about the short-term, it’s about how much market exposure do we want and do we think we get rewarded for that,” he said.
Given that many believe we are in the late stage of the cycle, Roe said the allocations in this bucket should come as no surprise with a preference for equities over bonds.
“At this point in the cycle, equities tend to outperform corporate bonds and we’ve seen that over the last year or so,” said Roe.
Elsewhere, Roe said that he liked the dollar because a stronger dollar was one of his “risk scenarios”.
Last year, this stance hurt the portfolio as the dollar had a weak run but the strong run of equities gave the overall portfolio good performance, he said.
Indeed, equity markets rallied in 2017 and the MSCI World index was up 18.48 per cent for the year. Coupled with low volatility this made the asset class particularly attractive on a risk-adjusted basis.
“This year we’ve kind-of seen the opposite. The dollar position has helped and at the same time the risk positions, the equities and so on, have been more mixed,” he countered.
US dollar vs sterling YTD
Source: FE Analytics
The next bucket that Roe and his team uses is an alternative risk premia strategy, where instead of investing in asset classes, they’re investing in strategies such as carry, momentum, value and volatility.
As with the market risk bucket, the team invests in these strategies with a similar medium-term outlook in mind.
“We say is there anything about the environment that is particularly difficult for this risk premia currently or makes the risk premia particularly attractive,” said Roe.
One such strategy that has worked well for Roe is the fixed income carry, which involves betting on interest rate curves.
Roe said: “So, it’s basically being long those internet rates curves that are steep and short those interest rates curves that are flatter and that tends to pay off over the long term.
“Within that space we’ve seen continued very strong performance of those fixed income carry strategies. That has been a star performer in that alternative risk premia space.
“This is because there’s economically quite a lot that seems to have supported it. So, those with an anchored short end have reconfirmed their commitment to that anchor.”
The European Central Bank (ECB) is a good example of the above and has confirmed it won’t be raising interest rates until next summer.
On the other hand, one strategy that the manager is keeping his eye on is momentum, which has been a lot “choppier” at an asset class level.
“The last couple of years have maybe been more supportive of momentum at an asset class level but now it’s being less supported,” he said.
“So, we’re questioning ourselves on those momentum strategies if we’re still comfortable that they will add value for us in this environment.
The manager added: “In particular, we cut the risk exposure on our bond trend strategy. And that’s because when rates got almost too stretched you worry about a central bank stepping in and saying something and undoing all of that momentum very quickly.”
Finally, the third bucket Roe uses takes a more short-term approach, looking at tactical trades that play out over the next hour, day, week, month or three months.
“That’s where we get into the positions that are less about our fundamental view of the economy and more about the tactical things that we think drive markets in the shorter term,” he said.
“So, a lot more of it’s about market positioning, a lot more of it’s about market sentiment, about triggers, about upcoming rate decisions or whatever else.”
Roe said the tactical side of the portfolio has done very well and they have managed to avoid “an implicit beta” here and avoided taking one kind of risk quasi-systematically.
Hard-currency debt has been in favour with Roe in this final bucket and it has tended to trade pretty attractively at times where there have been specific concerns in certain countries.
An example of this he used is a Mexican trade, which has added nearly 1 per cent to the fund’s returns alone.
He bought into Mexican bonds at a time when everyone was worried about NAFTA (North American Free Trade Agreement) and the recent elections in the country, which saw a hard-leftist getting elected to the presidency.
MSCI Turkey performance YTD
Source: FE Analytics
Another example would be Turkey: “Turkey we really dislike, but when the market really panicked a few weeks ago, we bought into it because we thought the market short-term would force intervention from Erdogan and the authorities,” Roe said.
“But now we’ve seen some reversion and we’re not convinced there’s any real panic in markets anymore, we’ve unwound around two-thirds of that position because we’re more concerned about the fact that the fundamentals look awful.
“And unless there’s real panic in that market we don’t really want to be invested in it.”