Looking forward to 2023: Our Portfolio Positioning

5 min read 13 Dec 22

Looking to next year we see an environment of lower growth and lower inflation, relative to 2022. We think those conditions will favour high quality bonds, which should perform well even as growth slows. In our view, earnings expectations for equities remain too high. Equities tend to perform worse than other asset classes when growth is weak. However, equities fell in 2022 in anticipation of a weaker economy and could be early to recover next year. Markets discount future expectations and history suggests that investing into an economic downturn is often more rewarding than waiting for recovery to be confirmed.

Here’s how our portfolios are positioned going into 2023:

Strategic Asset Allocation

The Strategic Asset Allocation is the overall mix of assets. It’s the key driver of long-term returns. We haven’t made any changes to our long-term views. Within equities, we have more in Asian and Emerging Market equities. Within fixed income, we don’t own UK government bonds. We have more in investment grade bonds and emerging market bonds. 

Tactical Asset Allocation

Tactical views are applied to a small part of the portfolios and are based on our views over the next six to 12 months. We made changes in December, to reflect a slightly more optimistic outlook.

  • We removed our positions in US and European equities; we used to have more in the US and less Europe. Having more in the US worked well for most of 2022, due to the strength of the US dollar.
  • We increased our overall exposure to bonds, after having less in the asset class for most of 2022.
  • We added to investment grade bonds and reduced high yield bonds. We think inflation will ease in 2023. Investment grade bond prices imply a high level of defaults. We think the asset class will be more resilient than expected. Investment grade bonds also tend to be longer dated than high yield bonds, which means the asset class will rise in value more sharply if interest rates fall.
  • We continue to have more in Listed Infrastructure Equities in our hybrid portfolios. These companies have more stable earnings than global equities, due to their revenues being linked to inflation or coming from critical services that are not affected by the overall economy.
  • We reduced absolute return strategies in our hybrid portfolios. We think volatility will be lower in 2023, creating fewer opportunities for these types of strategies.

Fund Selection

We also made changes to the funds in our passive and hybrid ranges. We did not make any fund changes in our Global ESG Themes portfolios. 

  • Within US equities, we added a smaller companies fund. Valuations are attractive and there are opportunities to buy high quality companies a bit cheaper than usual. We expect smaller companies to outperform over the next 12-18 months.
  • We removed the short duration investment grade bond funds from portfolios. This makes the portfolios more sensitive to changes in interest rate expectations. We have done this because we think interest rate expectations are too high at present, and we want the portfolios positioned to benefit if the overall market view changes. The risk is that losses will be higher if interest rates rise more than expected.

The higher rate environment presents both opportunities and risks. Fixed income finally offers a reasonable income - something investors have not had for many years. While we think rates will fall, they will not go back to the lows of the past decade. We think a higher rate environment will require more dynamic asset allocation within multi-asset portfolios. 

We wish you a happy holiday season and look forward to 2023. 

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