Beyond beta: focus on tactical allocation and relative value

A new 2015 Asset Allocation Outlook by Mihir Worah has just been released.

Key Points:

– Investors already weary of a low yield environment complicated by uncertainties – geopolitical tensions, plummeting oil prices, volatile currencies, to name a few – may need to prepare for another challenging year in 2015. From an asset allocation perspective, achieving target returns may be difficult. Not only do we anticipate a tug-of-war escalating between divergent monetary policies and uneven global economic growth, we also observe that 2015 begins with fuller asset valuations than in the recent past and a persisting low yield environment.

– Yet, the picture is not entirely bleak: We anticipate a more extended business cycle through the combination of a slow-moving Fed willing to chase inflation rather than impede robust U.S. growth and increased policy stimulus from the European Central Bank (ECB) along with a continuation of the Bank of Japan’s (BOJ) asset purchases. As long as the odds of a recession remain low, it should be possible to find certain risk assets that will deliver attractive returns.

– Bottom line: We believe an overweight to equity risk is still warranted and see pockets of opportunity across credit sectors. In contrast, we are modestly negative interest rate risk, and we have a neutral stance on commodities. In 2015, an emphasis on robust portfolio construction through targeted diversification and a focus on exploiting relative value opportunities within and across asset classes will be more important than the bold “beta bets” that have been sufficient over the past few years.

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