Barbell approach apt for risky markets: First Sentier
There is insufficient liquidity in markets to compensate for the volatility, meaning investors should opt for a barbell approach to their portfolio construction, according to First Sentier.
The firm said although markets had stabilised, risks remained and the pace of the recovery was uneven.
In its 2021 outlook, the multi-asset solutions team said there had been a ‘large bifurcation’ between the equity winners and losers with the Nasdaq up 43% and the FTSE 100 down 14% last year.
For fixed income, it was currently failing to offer enough ‘income’ which meant investors had to be careful which areas they went into.
Kej Somaia, co-head of multi-asset solutions, said: “Unfortunately, there’s not enough ‘income’ in fixed income at the moment to compensate for the volatility in capital value. Instead, we favour a ‘barbell’ approach, owning some longer dated government bond exposures, and other higher yielding areas of fixed income such as corporate credit or emerging markets debt. We think this provides the diversification of high-quality government bonds while generating some income”.
The team’s portfolios had a neutral allocation to equities while it removed investment grade credit in favour of global government bonds, which increased from 16.5% to 33%. It also reduced the exposure to Australian government bonds which brought the overall fixed income allocation down by 15%.
“Exposure to defensive (lower-risk) assets such as Australian government bonds and cash can be beneficial during times of uncertainty, but as conditions continue to improve we expect a search for yield to resume in earnest. As a result, we have reduced the overall allocation to fixed income, lowering the exposure to Australian government bonds and moving part of this to global bonds,” Somaia said.
First Sentier Multi-Asset Real Return Fund: Neutral Asset Allocation as at December 2020
Source: First Sentier Investors
AUTHOR
Laura Dew
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