With cash rates globally at, or near, historic lows, investment managers are reducing their return expectations across a broad range of asset classes, says Zenith Investment Partners in their latest Multi Asset Sector review released last week.
Zenith’s Head of Income and Multi-Asset Research, Andrew Yap said “participants within Zenith’s sector review have highlighted that Quantitative Easing (QE) and other interventionist policies have had a marked impact on investment markets, making the task of portfolio construction more challenging. This has occurred at a time where many markets are trading at extremes and asset classes are exhibiting higher correlation”.
“Investment managers have sought to take pre-emptive action by employing non-traditional portfolio hedges and having a greater emphasis on cost efficient trade expression” said Yap.
“Zenith views these activities favourably, believing they act to both enhance the defensive qualities of a multi-asset portfolio, whilst also providing managers with further flexibility to respond to dynamic market conditions. However, suppressed yields around the globe has made the task of portfolio management more challenging for those offering to market multi-asset solutions’ said Yap, “as Investors have become less sensitive to fundamentals, optimisers are losing their relevance, and portfolios are becoming less resilient”.
Yap explains further by saying ‘In 2016, it has become more difficult to generate yield through fixed income investment owing to the absence of a more traditional (and positively sloped) term structure.
Furthermore, with a growing percentage of global debt trading on negative yields, this has necessitated investors to look elsewhere for yield.
We have also identified a number of managers using optimisers that did not recognise the asymmetry of negative bond yields (with 0% the assumed lower bound). By virtue of this limitation, volatility attributable to bonds has been underestimated and by consequence, portfolios constructed based on these optimised outputs have the potential to be less efficient.
Portfolios have also become less resilient’ said Yap. ‘Traditionally, investors retained an exposure to fixed income assets not solely for income generating purposes, but also for their defensive characteristics. Key amongst these has been the low correlation that has existed between bonds and equities through time.
Disappointingly however, this relationship has started to break down as bond yields have been driven to historical lows. Managers have therefore sought to allocate capital to less traditional sources of portfolio hedging including high grade corporate bonds, alternatives and illiquid assets in an effort to enhance a portfolio’s capital protection qualities.
Summary of the Zenith 2016 Multi Asset Sector Review:
From an initial universe of 334 products:
• 9 were rated “Highly Recommended”
• 53 were rated “Recommended”,
• 28 were rated “Approved”
• 228 were “Not rated”
A further 7 funds were ‘Under Review’ and 9 had ratings ‘Pending’ at the time of the Sector Review.
