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Multi-asset managers reduce investment outlook

Investment managers are reducing their return expectations across a broad range of asset classes as cash rates globally reach or approach historic lows, according to a Zenith Investment Partners sector review.

The “2016 Multi Asset Sector Review” revealed quantitative easing and other interventionist policies had had a marked impact on investment markets, making the task of portfolio construction more challenging, according to participating managers.

“This has occurred at a time where many markets are trading at extremes and asset classes are exhibiting higher correlation,” Zenith head of income and multi-asset research Andrew Yap said.

“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.

“Zenith views these activities favourably, believing they act to both enhance the defensive qualities of a multi-asset portfolio while also providing managers with further flexibility to respond to dynamic market conditions.”

However, suppressed yields around the globe had made the task of portfolio management more challenging for those offering multi-asset solutions, Yap said, as investors had become less sensitive to fundamentals, optimisers were losing their relevance and portfolios were becoming less resilient.

Furthermore, it had become more difficult in 2016 to generate yield through fixed-income investment owing to the absence of a more traditional and positively sloped term structure, Yap said.
And with a growing percentage of global debt trading on negative yields, investors had to look elsewhere for returns, he added.

The review also identified a number of managers using optimisers that did not recognise the asymmetry of negative bond yields.

By virtue of this limitation, volatility attributable to bonds has been underestimated and, in consequence, portfolios based on these optimised outputs were potentially less efficient.

Yap highlighted that portfolios had also become less resilient.

“Traditionally, investors retained an exposure to fixed-income assets not solely for income-generating purposes but also for their defensive characteristics,” he noted.

“Key among these has been the low correlation that has existed between bonds and equities through time.”

Disappointingly, however, this relationship had started to break down as bond yields were driven to historical lows, the review said.

Managers had 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.

From an initial universe of 334 products, Zenith rated nine products highly recommended and 53 recommended.

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