investment viewpoints

    Outlook 2021 – multi-asset

    Outlook 2021 – multi-asset
    Aurèle Storno - Chief Investment Officer, Multi Asset

    Aurèle Storno

    Chief Investment Officer, Multi Asset
    Alain Forclaz - Deputy CIO, Multi Asset

    Alain Forclaz

    Deputy CIO, Multi Asset

    The sustainability transition to a Circular, Lean, Inclusive and Clean (CLIC™) economy

    We believe the next frontier in integrating sustainability from an investment perspective will relate to asset allocation, for example how sustainability will affect portfolio construction decision making. For the moment, sustainability integration is primarily a security selection exercise, informed by both bottom-up, company specific information, as well as top-down analysis, such as how the mega trends of the sustainability revolution (such as a transition to a CLIC™ economic model) may impact economic sectors and which companies are best placed to exploit them. Yet, this issue is bound to extend into a more generalised asset allocation process, incorporating criteria that would affect the allocation to one market, or asset class, over another. 

    In 2020, we have integrated such criteria into our basket construction principles, which also considers other cardinal constraints such as liquidity, fundamental factors and risk diversification. This means our asset allocation models can often deviate significantly from a more generic market-standard index approach. The addition of sustainability criteria into our multi-objective portfolio optimisation process has tilted our allocation in a meaningful way and has systematically improved all our sustainability scores relative to their sectorial market cap benchmarks.

    A focus on behavioural biases and market inefficiencies will continue to play a useful role in diversifying sources of return.

    What will a post-coronavirus world look like?

    We believe change is part and parcel of managing multi-asset portfolios. In order to manage uncertainty, our long-held view remains that diversification, in various guises, is the bedrock of portfolio construction: across asset classes (so as to capture their relative dynamics across the macroeconomic cycle) and also across sources of return and beyond. 

    Concentration is the worst response to uncertainty, in our view. While performance of sovereign bonds has (once more) been very positive in 2020, the protection these assets offer is likely to prove weaker going forward than has been the case in previous market shocks. This means other sources of portfolio protection  are required – ranging from a straight-forward shock absorber (cash), to more sophisticated instruments (convex volatility-based tail hedges) through to more typical safe havens (inflation-linked bonds and gold). In short, numerous complementary options exist that have proved effective in sheltering portfolios from this year’s turmoil. 

    Against a backdrop of change, human nature doesn’t change so much. This means a focus on behavioural biases and market inefficiencies will continue to play a useful role in diversifying sources of return. However, we believe diversification is also required in other, less obvious, parts of the investment process. Some of our recent research, for instance, has focused on incorporating implied volatility (which is forward looking and reflective of investors’ expectations for future market movements) in addition to our existing historical volatility models. This enables us to anticipate change, rather than merely react to it – something we believe will prove particularly useful in this brave, new post-coronavirus world.

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