multi-asset
10 years of All Roads: dynamic, adaptive multi-asset investing
Need to know
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A decade of change
When we launched our All Roads flagship strategy 10 years ago, the Great Recession was reaching its conclusion and US lawmakers were in the throes of avoiding a fiscal cliff. In Europe, 2012 marked the year that European Central Bank chief Mario Draghi did ‘whatever it takes’ to save the euro. In both areas, inflation was just above 2.0%.
Fast forward to today, and the global economy has been transformed by a pandemic, a decade of unprecedented monetary accommodation leaves central banks sitting on massive balance sheets, and inflation overshadows everything.
That was then and this is now. Our newly-developed proprietary nowcasting indicators (see figure 1) highlight the similarities and differences in the macroeconomic backdrop between 2012 and the present day. For instance, both periods are marked by post-recovery growth, during which China proves a laggard whereas the US holds firmer footing. But in 2012, inflation surprises were skewed to the negative, in contrast with surging prices today. A decade ago, central banks relied more on rhetoric to turn their policy ships – at least in the US – while today they appear more intent to act through deeds.
Figure 1. Nowcasting indicators: 2012 vs 2022
Source: LOIM. Reading note: LOIM’s nowcasting indicator gathers economic indicators in a point-in-time manner in order to measure the likelihood of a given macro risk such as growth, inflation surprises and monetary policy surprises.
Equipping investors for stable returns
Economic periods come and go, combining specificities to create an ever-changing environment that challenges and rewards investing on a daily basis. Today’s geopolitical stress also falls into the never-ending game of similarities and differences.
Recognising that the only certainty is change, we sought to design a multi-asset strategy that was well-equipped to deal with uncertainty but did not curtail investors from capturing stable returns. All the while, we also understood the importance of removing the emotional element to investing, relying instead on foundational strategic principles of diversification and investment across asset classes in a systematic (or disciplined) framework, putting research at the heart of the strategy and ensuring tactical adjustments to ensure agility and responsiveness.
As today presents a fresh set of investment opportunities and challenges, we look back and forward to explain what makes All Roads tick.
Adapting, as markets evolve
The All Roads strategy was conceived to dynamically adapt to evolving market conditions by investing across asset classes, as shown in figure 2. No single asset class drives all our of returns: in some years rates have performed best, whereas in others equities shone more brightly. We believe that being always positioned across all asset classes ensures the deep benefits of diversification and enables us to capture return opportunities from varied (and changing) allocations.
Figure 2. Contribution by asset class to performance, total and yearly.
Source: LOIM. Past performance is not an indicator of future returns. Refers to LO Funds – All Roads EUR N share class, gross of fees. Data as of 31 January 2022.
Inflation is undoubtedly steering market sentiment today. We prefer to take a structural view by always preparing for an inflation shock: rather than making a ‘big call’ on the future we instead prepare for any eventuality.
In terms of our allocation, that has meant our bond holdings performed well in the deflationary environment of the past decade (see figure 3), but we remained prepared for an inflationary shock through our commodities or inflation-linked bonds allocations. As inflation began to hold sway, last year our commodities allocation came to fruition, making a significant contribution for only the second time since the strategy was launched. We still believe that bonds always have a place in a multi-asset portfolio, even if the weight changes, and especially in light of today’s concerns about a central bank policy error.
Figure 3. Performance contribution and inflation correlation
Source: LOIM. Refers to LO Funds – All Roads EUR N share class, gross of fees. Past performance is not an indicator of future returns. Data as of 31 December 2021.
As a rule of thumb, we do not aim to avoid so-called losers or focus on so-called winners. Instead, we accept that both are needed but construct All Roads to make more on the temporary winners than it loses on the temporary losers, while benefiting from all of them over the long run.
Research programme
A dedicated research programme informs all of our decisions and is at the core of our systematic investment process. We believe in a scientific and disciplined approach to the design and implementation of our risk models, alpha strategies and other topics.
Members of our team have earned various advanced degrees and qualifications, such as PhDs and CFAs, as well as professorships, from some of the most prestigious academic institutions globally.
In order to maintain a high calibre of research, we adhere to the following values:
- Excellence and quality. Our engineering background influences the way we approach the implementation of our strategies. The “Swiss made” trademark has a strong resonance with our research as we strive to assemble the highest standard components in our investment process.
- Our research is designed to have simple, actionable and practical outcomes.
- As an investment team, our thought process is largely influenced by the impact of our research on risk-adjusted performance. This is not a straightforward assessment, but we always keep it in mind when we establish priorities among our extensive list of research projects.
Over the past decade, we have continually enhanced our process, learning from our experiences and exploring new opportunities, integrating investment features such as drawdown management as well as adapting our allocation to incorporate inflation-linked bonds. This drive to improve remains the focus for the team today and is set out in the timeline below.
Performing in bull and bear markets
The All Roads strategy was designed to perform in both bullish and bearish markets. Our goal is to smooth out portfolio sensitivity to the economic cycle through strategic, tactical and downside management layers, providing robust returns regardless of the market environment.
Today, the crisis in Ukraine has triggered risk aversion in markets and led us to continue positioning the strategy far more cautiously, although our positioning has been cautious for some time already. Risks are clearly rising and we control them according to our adaptive process and disciplined philosophy.
A long-term bear market is usually not triggered by geopolitical unrest, however, suggesting this correction could be temporary, in our view. The inversion of the VIX term structure – with April/May contracts being below the 30% level – shows the market perceives current risk levels to be higher now than in the future. This sentiment is also reflected in a spike in Ukraine’s CDS (an idiosyncratic measure) matching the rise in the VIX (a measure of systemic risk).
The positioning of All Roads had already been on a derisking path for a few months, driven by realised drawdowns. Coincidentally, risk levels (or volatility) have been on the rise across all asset classes, except commodities. This spurred additional risk reduction. Meanwhile, momentum signals turned negative this year and are now in negative territory for all risky assets (with the exception of commodities) as well as government bonds.
As a consequence, the fund’s exposure to risk has been reduced quite substantially. We currently have about 65% total exposure (notional) for the All Roads medium risk profile and 35% in cash. This kind of cautious exposure has been seen only a few times since the fund’s inception (in 2013, 2015, 2018 and during the initial Covid-19 outbreak in 2020). Presently, signals keep deteriorating slightly, especially as far as volatility and momentum, as well as risk appetite, so we are still reducing marginally.
A look back at 2019 and 2020
Bullish and bearish markets surfaced back to back in 2019 and 2020 and presented a useful lens through which to assess how All Roads delivered on its stated objectives. We analysed 1,200 multi-asset funds from Morningstar’s Cautious and Flexible Allocation categories, ranking them in terms of performance during the bullish market conditions in 2019 and challenging market conditions in Q1 2020. Strategies that deliver strong growth during positive market conditions while protecting capital during downside periods are considered to be successfully delivering on their stated commitments.
During both periods, all three All Roads strategies delivered on this stated aim and outperformed most of our competitor’s strategies2. The Conservative strategy behaved in line with its conservative risk profile, while the balanced and Growth strategies were both in the top performing, good all-weather funds category.
For the full analysis, please click here.
A stable return
Stable returns govern everything at All Roads. Figure 4 shows the steady annual returns delivered by the strategy since inception over all holding periods of at least 3 years. This illustrates how the fund has been able to protect capital3 over this horizon without any negative annualised performance, and the stability of the return distribution, which is a bit narrower than a ‘normal’ distribution.
Figure 4. Distribution of LO Funds - All Roads annual performance
Source: LOIM. Refers to gross performance of EUR N share class for holding periods greater than or equal to 3 years. Past performance is not an indicator of future returns. Capital protection is a goal that cannot be guaranteed. Data as of 31 January 2022.
The next decade
The past decades relied on four certainties: most environmental resources were available at low cost, governments and central banks had an aversion to economic setbacks, and the human population expanded amid a globalisation trend that appeared unstoppable.
The post-pandemic recovery is seen by many as a turning point in history when each of these major trends could change, ultimately leading to one highly likely consequence: interest rates rising. Higher rates could eliminate the excesses created by the global fight against the pandemic and reverse years of abnormally cheap capital. The ultimate market consequences of such seismic shifts are still unknown, but appear likely to test investors’ nerves – not only in fixed income markets but across all risky asset classes.
Using a risk-based approach in a world of unanticipated change has been instrumental to our strategy achieving efficient returns over the last decade. This investing philosophy proved extraordinarily useful through the pandemic and we believe it will continue to be vindicated in the potentially troubled decade ahead. Rather than call for excessive caution, we rely on a sensible, disciplined and dynamic combination of risk premia to navigate uncharted territory – for us, this is the essence of risk-based investing.
Sources
important information.
For professional investors only
The Fund is authorised and regulated by the Luxembourg Supervisory Authority of the Financial Sector (CSSF) as a UCITS within the meaning of EU Directive 2009/65/EC, as amended. The management company of the Fund is Lombard Odier Funds (Europe) S.A. (hereinafter the “Management Company”), a Luxembourg based public limited company (Société Anonyme SA), having its registered office at 291, route d’Arlon, L-1150 Luxembourg, authorized and regulated by the CSSF as a Management Company within the meaning of EU Directive 2009/65/EC, as amended. The Fund is only registered for public offering in certain jurisdictions. The management company of the fund may decide to terminate the arrangements made for the marketing of the Fund. The articles of association, the prospectus, the Key Investor Information Document, and the subscription form are the only official offering documents of the Fund’s shares (the “Offering Documents”). They are available on http//www.loim.com or can be requested free of charge at the registered office of the Fund or of the Management Company, from the distributors of the Fund or from the local representatives as mentioned below.
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An investment in the Fund is not suitable for all investors. There can be no assurance that the Fund's investment objective will be achieved or that there will be a return on capital. Past or estimated performance is not necessarily indicative of future results and no assurance can be made that profits will be achieved or that substantial losses will not be incurred. Where the fund is denominated in a currency other than an investor's base currency, changes in the rate of exchange may have an adverse effect on price and income. All performance figures reflect the reinvestment of interest and dividends and do not take account the commissions and costs incurred on the issue and redemption of shares/units; performance figures are estimated and unaudited. Net performance shows the performance net of fees and expenses for the relevant fund/share class over the reference period. This document does not contain personalized recommendations or advice and is not intended to substitute any professional advice on investment in financial products. Before making an investment in the Fund, an investor should read the entire Offering Documents, and in particular the risk factors pertaining to an investment in the Fund, consider carefully the suitability of such investment to his/her particular circumstances and, where necessary, obtain independent professional advice in respect of risks, as well as any legal, regulatory, credit, tax, and accounting consequences. This document is the property of LOIM and is addressed to its recipient exclusively for their personal use. It may not be reproduced (in whole or in part), transmitted, modified, or used for any other purpose without the prior written permission of LOIM. It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful. This document contains the opinions of LOIM, as at the date of issue. The information and analysis contained herein are based on sources believed to be reliable. However, LOIM does not guarantee the timeliness, accuracy, or completeness of the information contained in this document, nor does it accept any liability for any loss or damage resulting from its use. All information and opinions as well as the prices indicated may change without notice. Neither this document nor any copy thereof may be sent, taken into, or distributed in the United States of America, any of its territories or possessions or areas subject to its jurisdiction, or to or for the benefit of a United States Person. For this purpose, the term "United States Person" shall mean any citizen, national or resident of the United States of America, partnership organized or existing in any state, territory or possession of the United States of America, a corporation organized under the laws of the United States or of any state, territory or possession thereof, or any estate or trust that is subject to United States Federal income tax regardless of the source of its income.
Source of the figures: Unless otherwise stated, figures are prepared by LOIM.
Important information on performance
Past performance is not a guarantee of future results. Where the fund is denominated in a currency other than an investor's base currency, changes in the rate of exchange may have an adverse effect on price and income. All performance figures reflect the reinvestment of interest and dividends and do not take account the commissions and costs incurred on the issue and redemption of shares/units; performance figures are estimated and unaudited. Net performance shows the performance net of fees and expenses for the relevant fund/share class over the reference period. Source of the figures: Unless otherwise stated, figures are prepared by LOIM.
Important information on benchmarks
Any benchmarks/indices cited herein are provided for information purposes only. No benchmark/index is directly comparable to the investment objectives, strategy or universe of a fund. The performance of a benchmark shall not be indicative of past or future performance of any fund. It should not be assumed that the relevant fund will invest in any specific securities that comprise any index, nor should it be understood to mean that there is a correlation between such fund’s returns and any index returns.
The strategy may include the use of derivatives. Derivatives often involve a high degree of financial risk because a relatively small movement in the price of the underlying security or benchmark may result in a disproportionately large movement in the price of the derivative and are not suitable for all investors. No representation regarding the suitability of these instruments and strategies for a particular investor is made.
If the funds are denominated in a currency other than that in which the majority of the investor’s assets are held, the investor should be aware that changes in rates of exchange may affect the value of the funds’ underlying assets. The portfolio risk management process includes an effort to monitor and manage risk, but does not imply low risk.
Emerging markets securities may be less liquid and more volatile and are subject to a number of additional risks including, but not limited to, currency fluctuations and political instability.
Models may be misspecified, badly implemented or may become inoperative when significant changes take place in the financial markets or in the organization. Such a model could unduly influence portfolio management and expose to losses.
Views and opinions expressed are for informational purposes only and do not constitute a recommendation by LOIM to buy, sell or hold any security. Views and opinions are current as of the date of this presentation and may be subject to change. They should not be construed as investment advice.
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