Income and growth: Is multi asset investing back in the limelight?

As risk-free yields continue to outpace inflation, investors keep facing the challenge of where to put their money. A narrow stockmarket rally, the potential for widespread geopolitical conflict, mixed economic sentiment and upcoming US elections are all contributing to the perception of an uncertain environment. Yet, would a balanced approach allow investors to achieve their goals while managing volatility along the way?

As the early August risk-off phase has shown, bonds once again provided portfolio insurance when equities sold off sharply. When needed, diversification still worked, after all. Equities, meanwhile, remain well-supported as investors keep expecting a ‘soft landing’ scenario for the US economy. Could this be an opportune time to deploy capital across asset classes?

Why income and growth?

Traditionally, investors have turned to stocks for capital appreciation while also using bonds to generate income and to provide a degree of protection in their portfolios. The rationale for these twin goals is clear: investors need income to fund expenses or fulfil financial obligations and, simultaneously, capital appreciation over time is crucial to guard against inflation eroding away the purchasing power of their assets. In our view, adopting a multi-asset strategy that combines the strengths of active management and diversification can become vital for realising both objectives effectively over the years, particularly in a rapidly evolving investment climate. Crucially – even though stocks and bonds had in the past typically experienced offsetting movements, and therefore provided portfolio stability – the disruption brought about by Covid-19 and the substantial fiscal and monetary responses marked a considerable change.

After around 25 years where holding both stocks and bonds was highly successful and multi-asset portfolios provided strong risk-adjusted returns, the significant repricing of bonds in 2022 presented a significant challenge as these two primary asset classes began trending in unison, either both rising or falling together. This shift underscored the importance of skilful active management in adapting to an unprecedented market situation, whilst continuing to offer positive outcomes for investors in the face of a rapidly-evolving investment landscape. Going forward, the key question remains: How might we capture a broader range of favourable opportunities to consistently provide both income and growth?

The importance of an active, dynamic approach

Within multi-asset portfolios, we have the flexibility to adjust investment allocations to tap into the most promising opportunities across a broad spectrum of assets. This approach is designed to create resilient portfolios that not only aim for income and growth over the medium term, but are also equipped to withstand unforeseen economic shocks. This principle indeed holds on both fronts, as we aim to dynamically respond to opportunities both on the income front – as we periodically take advantage of attractive yields – and also in terms of capital generation, where we strive to harmonise long-term valuation-based strategies with short-term opportunistic moves.

Equities, bonds and everything in between: The power of diversification

The chart below illustrates the balance between risk and return for several major asset classes over the last two decades, along with their average yield.

It is evident that while investors stand to benefit from a global, diversified investment approach, there are nonetheless important trade-offs that must be actively addressed over time through active management.

In other words, portfolio diversification can’t be achieved through a static approach to asset allocation as correlations shift over time, and active perspectives are essential to inform considerations at the portfolio level to give precedence to the most compelling investment opportunities while understanding the ever-changing nature of risks.

Looking forward

So, what of our own portfolios? As of late summer 2024, we believe that – while investors are faced with a potentially compelling set of opportunities, especially in a multi-asset context – it is key to keep practicing our approach of ‘patient opportunism’.

On the income front, we see compelling opportunities across developed markets where we especially like US Treasuries which, at current yield levels, can provide a meaningful contribution to income, while also offering reasonably-priced portfolio insurance properties.

Furthermore, we maintain a healthy exposure to local currency emerging market debt, with positive views on countries such Turkey, Brazil and South Africa. In the context of a diversified basket approach to the asset class that spans several more issuers, we expect the cost of capital for these sovereigns to keep coming down as their economies keep developing.

In terms of more capital growth-oriented holdings, we remain for the moment moderately constructive on developed market equities. Despite having benefited from the recent strong performance of US tech stocks, we have mitigated our positions to reflect moderate yet growing concerns about the US employment picture.

Finally, we believe that – as investor beliefs seems to be finally moving away from a fixation with inflation – the portfolio insurance properties of government bonds might have been finally restored (at least partially), setting the stage therefore for potentially attractive outcomes for multi-asset investors.

As the environment remains fluid, we keep therefore looking for instances of price action being at odds with fundamentals – which would then offer opportunities to add value for our investors.

The value of investments will fluctuate, which will cause prices to fall as well as rise and investors may not get back the original amount they invested. Past performance is not a guide to future performance. The views expressed in this document should not be taken as a recommendation, advice or forecast.