Australian investors must broaden their opportunity set to face the dual challenges of low global interest rates and historically low economic growth, according to Investec Asset Management.
Speaking at a media briefing in Sydney today, Michael Spinks, Portfolio Manager for Investec’s Diversified Growth strategy, said the combination of six years of rising global equity prices, persistent low economic growth and unprecedented quantitative easing by key central banks, was creating a unique set of circumstances that made it increasingly difficult for investors to find value.
“In this environment, investors need to be aware that the old rules of diversification do not necessarily apply,” said Mr Spinks. “Financial markets are an increasingly multi-dimensional world, so investors need to closely examine their portfolio allocations and look at the underlying drivers of asset returns to determine if they are truly diversified.”
Mr Spinks said it was important for investors to focus on asset class behaviours, not labels. For instance, while bonds as an asset class are generally thought to behave differently to equities, certain types of bonds are in fact highly correlated to the global equity market.
“Asset class relationships can also vary significantly over time,” he said. “For instance, while property as an asset class has been highly correlated to equities performance since the Global Financial Crisis, prior to this it actually had a very low correlation to equities markets.”
In line with this thinking, the strategy of Investec Asset Management’s recently launched Diversified Growth Fund (Australian) was to group assets into three distinct behaviour categories – Growth, Defensive and Uncorrelated.
“Growth assets – such as equities, high yield bonds, emerging market debt and property – tend to have returns directly related to expectations of real economic growth,” said Mr Spinks.
“Defensive assets – such as developed market government bonds, index-linked bonds and hedging strategies like put options – should react positively to declining expectations of economic growth. Finally, uncorrelated assets such as gold and infrastructure, perform in a way that is generally unrelated to growth.”
Given the strong support for global growth in the coming months from weaker oil prices which are expected to remain so, Mr Spinks said he believed there was particular value to be found in growth assets at present.
“Global equity valuations are looking reasonable historically on a price to earnings basis, but there is some divergence in terms of the value different markets present,” he said. “We favour Japanese equities in particular, where strong earnings growth has been boosted by corporate tax cuts, and large-cap US tech companies, as we believe they have a proven ability to maintain growth rates, as well as realistic earnings expectations and strong cash flow generation.”
Mr Spinks said he believed a multi-asset approach was particularly important for investors looking to manage risk as well as return. “Multi-asset strategies – those that utilise a truly diversified approach – may provide efficient integration of the key components needed to reduce return variability, as well as providing the potential for a strong level of returns.”
Source: Honner
