Multi-Asset’s current Tactical Asset Allocation

Liontrust Multi-Asset Team

Tactical Asset Allocation (TAA) is one of the five stages of the Multi-Asset investment process – the others being Strategic Asset Allocation (SAA), fund selection, portfolio construction and monitoring.

The Multi-Asset investment team has a medium term view – 12 to 18 months – of the prospects for each asset class and this forms the TAA. Each asset class is assigned a rating from one to five, with one being the most bearish and five the most bullish.

The TAA is the target position (not the actual position) for every asset class, and the investment team builds towards this within the Multi-Asset funds and portfolios over time. Having a 12 to 18-month view means the team will increase their positions when the valuations of the asset classes are attractive. The team’s core approach is to buy low and they will not overpay for assets, however highly they score.

The team reviews the TAA every quarter but it is important to stress this does not reflect a quarterly view. The TAA rating is only altered up or down when there is a fundamental change in the assessment of a particular asset class, and by taking a longer term view the team are seeking to ignore short-term market noise and avoid trying to time the market.

The table below shows the team’s current TAA and includes all asset classes regardless of whether they are included across the range of funds and portfolios. The direction of travel shows the last change in the TAA, whenever this occurred.

 

Asset class

Q1 2021 Score

Direction of travel

Commentary

Overall

4

We are still risk-on but acknowledge there are risks to this view, from growth disappointments, to virus mutations that reduce vaccine efficacy, to vaccine rollout bottlenecks. Global markets have come a long way from the 2020 lows but a combination of government spending and decent corporate results largely justify this. No sign of tightening policy in the medium term, combined with pent-up demand from lockdowns and reasonable valuations outside of US mega caps, provide ongoing reasons to be optimistic.

Cash

1

Cash offers little to no prospect of a real return in the coming years, with major central banks remaining committed to ultra-loose monetary policy. Cash does have the benefit of offering a store of value at times of market stress, so a modest allocation may be appropriate in portfolios depending on the mandate.

UK gilts

1

Yields remain close to all-time lows and the bias of risk looks to be to the upside (or to the downside in price terms) especially if the spectre of inflation finally raises its head in 2021. Gilts still provide a useful function as portfolio insurance in times of market duress.

Global government bonds

1

A global basket of currencies and interest rate risks can result in a differentiated return stream from UK gilts. Yields remain close to all-time lows and the bias of risk looks to be to the upside (or the downside in price terms) especially if the spectre of inflation finally raises its head in 2021. These bonds still provide a useful function as portfolio insurance in times of market duress.

Investment grade (IG) corporate bonds

2

The paucity of spread over government bonds means investment grade is tainted by overall low benchmark yields. The modest yield pick-up means IG looks reasonable from a relative value perspective versus sovereigns but it is not an attractive proposition in its own right. In times of market stress, however, this debt should benefit from its inherent duration.

Index-linked bonds

3

This debt would benefit versus nominal government bonds if inflation proves to be ahead of expectations, although the possibility of higher prices is now more widely anticipated than it was last year. Index-linked bonds tend to have longer duration than the same tenor nominals so duration positioning needs to be considered. Big moves out in yields will also impact these bonds.

High yield

4

While spreads are still relatively tight by historical standards, the returns available from high yield are reasonably attractive and an overall risk-on environment should be supportive of prices. Investors should expect to receive at least coupon yield and potentially grinding higher capital appreciation as spreads drift in. HY will experience weakness if spreads widen, but government support should keep a lid on default tail-risk.

Emerging market debt

3

Spreads look reasonable but the idiosyncrasies of the emerging market environment are potentially better rewarded in EM equities. Furthermore, US dollar- denominated debt will be subject to moves in the US yield curve. There is some potential for support from a softer US dollar, better liquidity than expected, and carry hunters.

Convertibles

4

The composition/concentration of global indices is a negative, as are valuations. But a positive overall market backdrop supports convertibles, which provide an attractive risk/return profile thanks to their optionality and the bond floor.

Equities overall

4

Global markets have come a long way from the 2020 lows but this is largely justified by government spending and decent corporate results. No sign of tightening policy in the medium term, combined with pent-up demand from lockdowns and reasonable valuations outside of US mega caps, give reasons to be optimistic. Risks to the downside would come from growth disappointments, virus mutations that reduce vaccine efficacy, or vaccine rollout bottlenecks.

US equity

2

The US is a formidable market with a strong entrepreneurial culture and a roster of world-class companies. While monetary and fiscal stimulus is likely to continue, valuations look stretched for the index overall, although the picture is better outside of mega-cap growth. A shift back towards ‘real world’ rather than virtual interaction will put pressure on technology revenues and, overall, share prices have already discounted better-than-expected earnings.

US small caps

4

Despite our overall caution on the US, we see smaller companies as ripe for a rebound in light of their significant underperformance versus large caps. As the recovery broadens, investors will be looking elsewhere and consumers flush with cash should benefit domestically orientated companies, especially small caps. As the economy reopens (we are bullish about the cycle), small caps should outperform large. A risk to this would come from tax hikes, which tend to hit small and mid-cap companies more than their larger counterparts.

UK equity

4

The UK was hit from all sides in 2020 with Covid impact, sector composition (heavy in struggling resources, financials and energy), and Brexit combining to make it the most unloved major market. Despite its global revenue base, there is too much pessimism in the price so, tactically, this is an attractive market. A strong pound is likely to be a headwind however.

UK small caps

3

A strong rebound in UK smaller companies is already under way but there is further scope for mean reversion with Brexit uncertainty disappearing, sterling normalisation and further M&A activity. On balance, small caps are now less attractive than UK large companies, which bore the brunt of anti-UK sentiment over the last few years.

European equity

4

The EU is struggling with vaccine rollout, which will delay any domestic economic rebound and could cause political issues. Export-led European stocks will be geared into a global recovery, however, and consumer brands should benefit from high levels of spending power that can turn on post lockdown. Overall, valuations look attractive and Europe is much further along the ESG path on a company by company basis than other markets.

European small Caps

4

European small caps are under similar pressures to their larger counterparts but should be well positioned to take advantage of global reopening and increased domestic consumption on the continent. Prospects would come under pressure should governments accelerate their plans to balance the books.

Japanese equity

5

Japanese equities, with a large proportion of export-driven businesses, are well placed to benefit from the global economic rebound. The third ‘Abenomics’ arrow of structural reforms is starting to bear fruit and continuing fiscal and monetary stimulus measures (the other two arrows) are also supportive. Furthermore, the Japanese market remains lowly valued compared to other developed markets. Stocks tend to benefit from yen weakness so local currency strength could provide a headwind to returns.

Japanese small Caps

4

Japanese small caps are under similar pressures to their large counterparts but should be well positioned to take advantage of global reopening and increased domestic consumption.

Emerging market equity

4

Emerging markets will benefit from the global reflation trade. Loose monetary policies and a weak US dollar also provide a supportive environment. Asian economies have, on the whole, fared well through the Covid crisis and domestic activity remains strong; non-Asian emerging markets have been less positive. Overall, EMs should benefit from robust commodity prices. EM equities remain highly geared into sentiment shifts – both positive and negative – and are also sensitive to domestic and international politics.

Asian equity

4

As with EM; Asia will benefit from the reflation trade and loose monetary policies and a weak US dollar provide a supportive environment. These economies have, on the whole, fared well through the Covid crisis and domestic activity remains strong. They should also benefit from robust commodity prices. Risks remain from the perspective of global sentiment as well as regional political tensions.

Property

3

Property offers a reasonable yield pick-up compared to many other asset classes and price moves in 2020 imply that a lot of bad news is already factored in. Capital values are starting to rebound but rental growth is decelerating. There is also uncertainty surrounding a number of property types in a post-Covid world: the anticipated demise of the office and high street retail sectors could well be overstated but current pressures on tenants will have long-term repercussions.

Commodities

3

Commodities have rebounded off their lows and would likely be positively correlated to improving news on global economic activity. Broad allocations to commodities should also provide some protection if inflation surprises on the upside. Conversely, downward price pressure could resume if growth disappoints following the initial post-Covid recovery.

Hedge funds

3

Given time, the right hedge fund strategy can provide a diversified return stream compared to more traditional asset classes. These funds are unlikely to keep up with a raging bull market but should post reasonable returns in a constructive environment for risk assets.

Absolute return

3

Well-chosen absolute return vehicles can be a useful diversifier to overall portfolio risk thanks to their low correlation with traditional asset classes. But they are unlikely to keep up with ultimate safe havens such as government bonds in times of market duress.

 

For a comprehensive list of common financial words and terms, see our glossary here.

Liontrust Insights

 

Key Risks & Disclaimer

Please remember that past performance is not a guide to future performance and the value of an investment and any income generated from them can fall as well as rise and is not guaranteed, therefore you may not get back the amount originally invested and potentially risk total loss of capital.

This content should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Examples of stocks are provided for general information only to demonstrate our investment philosophy.  It contains information and analysis that is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content of this document, no representation or warranty, express or implied, is made by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified. It should not be copied, faxed, reproduced, divulged or distributed, in whole or in part, without the express written consent of Liontrust.


Wednesday, March 17, 2021, 2:03 PM