Spotlight
MULTI ASSET
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This material is for distribution to professional investors only, however it is not intended for distribution to any person or entity who is a citizen or resident of any locality, state, country or other jurisdiction where such distribution, publication, or use would be contrary to law or regulation. Only the latest version of the fund’s prospectus, simplified prospectus, regulations, annual and semi-annual reports may be relied upon as the basis for investment decisions. These documents are available from Pictet Asset Management Ltd, Moor House, Level 11, 120 London Wall, London, EC2Y 5ET or www.fundpartners.co.uk , Fund Partners Ltd, Cedar House, 3 Cedar Park, Cobham Road, Wimborne, Dorset BH21 7SB. The information and data presented in this document are not to be considered as an offer or solicitation to buy, sell or subscribe to any securities or financial instruments. Information used in the preparation of this document is based upon sources believed to be reliable, but no representation or warranty is given as to the accuracy or completeness of those sources. Any opinion, estimate or forecast may be changed at any time without prior warning. Investors should read the prospectus or offering memorandum before investing in any Pictet managed funds. Tax treatment depends on the individual circumstances of each investor and may be subject to change in the future. Past performance is not a guide to future performance. The value of investments and the income from them can fall as well as rise and is not guaranteed. You may not get back the amount originally invested. This document has been issued and approved by Pictet Asset Management Limited, which is authorised and regulated by the Financial Conduct Authority, and may not be reproduced or distributed, either in part or in full, without their prior authorisation. The Authorised Corporate Director of the FP Pictet Multi Asset Portfolio is Fund Partners Limited which is authorised and regulated by the Financial Conduct Authority.
Welcome
Uncertain markets, shifting demographics, regulatory change – there is no doubting strong forces are at work in investment today and they are posing some tough questions for both financial advisers and their clients. In many instances, however, outcome-oriented multi-asset investments are providing some very acceptable answers. In this sponsored guide we look at the multi-asset approach deployed by Pictet Asset Management as they target high real rates of return. We also discuss why choosing the right sectors – rather than the right regions – is now key to maximising investment returns. We hope you find our supplement both useful and thought-provoking.
We want flexibility so our minimum weighting in all assets is zero. If we don’t like something, we don’t own it
Pictet’s Andrew Cole and Shaniel Ramjee discuss the challenges of a low yield environment and how they seek effective diversification and high real rates of return through a multi-asset approach
Andrew Cole: We like technology. We’ve been confident about the consumer and corporate spending on tech. At the other end of the spectrum we like mining stocks – not so much over the last few months but certainly over the last two years because the mining companies stopped digging holes and instead started to preserve their cash. That’s when you want to own those stocks. Over the last two years that’s been about the only thing we’ve owned in the UK, apart from UK house builders post the EU referendum. Right now, what are we sniffing? Emerging markets. We’ve had very little exposure to emerging markets all year. Our secular work suggests that over the next 5-10 years there are superior returns there but we are currently fearful of a stronger dollar and fearful of rising interest rates and tightening liquidity. So this year our view has been that emerging markets are vulnerable and we don’t want to sail into that headwind. Elsewhere the global economy continues to be above trend which tends to be good for corporate profits. What has got too cheap? Well our sense is that at some point this year emerging markets might just be that.
Which holdings have worked well for the fund over the past year?
Shaniel Ramjee: Risk means two things to our clients, the first being the risk of losing money. We are there to help them grow their savings by compounding returns as frequently as possible and in real terms. Clearly we want to avoid the down years for markets so clients don’t suffer those big losses. But also, for our clients, risk means not growing their capital enough. Not being able to capture opportunities when they are there is just as risky as avoiding the down years. One thing that worries us, however, is that leverage has risen a lot in the cycle, particularly in the corporate sector. So when portfolios largely consist of either corporate debt or corporate equities, many of those constituent companies will be highly leveraged, and investors who seek income typically go to the companies that pay high dividends. In turn, companies that pay high dividends tend to have more stable earnings profiles. These are what we call ‘defensive’ companies.Now over the last investment cycle, in order to pay out dividends, those companies borrowed a lot of money. So what might seem to be a company with a stable earnings profile is now highly leveraged. In a slowing growth environment they look stable but as interest rates rise, those are the riskier companies.What are the key points of difference between Shaniel Ramjee: I think the biggest thing that differentiates us versus our peers is that we are prepared to make very large changes to the asset allocation when it’s appropriate. That allows us to take advantage of the growth and capital defence periods of the market. But it also allows us to look at very specific opportunities. So when markets are volatile, we can look at the special situations out there and ask: “are these opportunities we should be investing in?” We have a reasonable track record of looking for these opportunities and extracting some value. So for example, through the fallout of the Italian election, and the election of the populist government, we saw Italian government bonds produce a very high risk premia when that bond market lost a lot of value. We were able to avoid that market at the beginning while also being nimble enough to buy assets cheaply. This is how we make tactical asset allocation decisions really work for the client.
Risk targeting remains a key concern for investors. How do you analyse these elements in your fund?
“A worry? Leverage has risen a lot in the cycle, particularly in the corporate sector”
Andrew Cole: Experience tells us that targeting income prohibits you from making the asset allocation changes you need to make, particularly at times of stress when you’re looking for capital values.We want flexibility so our minimum weighting in all assets is zero. If we don’t like something, we don’t own it because we want to defend capital at times of stress. This is why we don’t target income. Instead our whole philosophy and process is to identify a total return structure. Andrew Cole: Getting effective diversification has become more challenging. Government bonds and equities used to give you a better risk return profile but in many areas of the world bonds don’t trade, yields are negative in real terms and they don’t give you any diversification. So why would you hold them, because all you’re doing is getting the riskiness of equities without any offset from government bonds? That doesn’t mean we don’t own some bonds. We hold them where we think there’s value attached and indeed where we think we can get some capital appreciation. But we try to be smart about it. Our first task is to think about the returns, and our second task is to think about risk management and how we can build a better risk-adjusted portfolio.
Much of the slowdown in the growth of global emissions in recent years has been driven by a combination of reductions in the US and China
China is the world’s deadliest country for outdoor air pollution, according to analysis by the World Health Organisation (WHO)
Wind power continues to grow strongly, providing 3% of global power
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What do you see as the major challenge for income investors today?
How do you seek effective diversification within the FP Pictet Multi Asset Portfolio?
What are the key points of difference between Pictet’s multi-asset fund range and its peers?
[We have] a continued, albeit modest, bias towards cyclicals - industry sectors that do especially well when the economy is expanding
The cost of solar panels have declined 80% since 2008, according to a recent report by the International Renewable Energy Agency
In 2016, the number of electric cars on the road reached two million globally
The UK delivers 16.6 billion litres of high-quality water every day to 63.9 million people
That’s not to say that investing by country or by region should be completely overlooked: each one has its sectoral strengths and weaknesses. Take information technology: such stocks make up 26 per cent of MSCI US index versus just 5 per cent of MSCI Europe. This helps to explain both why US has outperformed this year and why Europe looks cheap on traditional valuation metrics. When you rebalance for sectors, much of that cheapness disappears. Of course, economic and policy divergences may yet re-emerge. In the US, for example, there is support for Reagan-style supply side reform: lowering taxes in a bid to increase total budget revenues. It is hard to see such policies being passed in Europe, where strict EU rules necessitate greater control over public debt. The rise of populism can play a part in triggering divergences as populist parties are more likely to follow non-conventional agenda or focus on domestic priorities. That would lead to greater dispersion of returns and lower correlations in the performance of their respective stock markets. Spotting and exploiting any shifts in the relative importance of sectors and countries is an important challenge for active managers. By identifying the segments of the market with strong earnings growth potential they can deliver attractive returns and outperform passive strategies. Such opportunities for alpha generation are further boosted by an increase in stock-level dispersion within major indices.
So, if sectors are the way to go, the next question is which ones to pick? Firstly, that means identifying those that will thrive and those that will struggle at this particular point in the economic cycle. For us that means a continued, albeit modest, bias towards cyclicals – industry sectors that do especially well when the economy is expanding. Consequently, we favour materials, energy and construction, which are likely to be among the winners as the global economy expands. Technology is another traditionally cyclical sector, albeit one where valuations look stretched after months of outperformance. Nonetheless, we continue to like the long-term growth of robotics and the digital economy. If companies can deliver real growth at a time when it is hard to come by, then a valuation premium could well be justified. On the other side of the coin, we are cautious on more defensive sectors like telecoms, utilities and consumer staples.Indeed, the importance of sector allocation bodes well for thematic investing more broadly. Companies that benefit from secular growth will gradually take a bigger slice of the economic pie. Today, everyone has an equity income fund. Tomorrow, perhaps, everyone will have a robotics or automation fund.
Cyclical bias
Which economy will grow faster this year: the Eurozone or the US? Which central bank will surprise markets the most? Fund managers spend an inordinate amount of time debating these issues and their implications for asset classes in different regions. But in fact, there hasn’t been much divergence in economic and monetary cycles for some time. We are in a period where global growth has finally synchronised, while policies have become broadly aligned. As a result, differentiating between countries hasn’t really helped drive investment performance, with share price moves dictated more by individual companies’ earnings. In this environment, we believe there are much better opportunities for alpha generation to be had from looking at asset allocation by global sector rather than by region. Both our market analysis and the attribution of our own portfolio returns support this view.The average 12-week dispersion of returns within the MSCI All-Country World Index – the extent to which earnings differ from the mean – shows that sectors have been increasing in importance relative to regions. Indeed, this trend has been in place for much of the past three years. Furthermore, quarterly rolling correlation of share price performance in different regions is hovering around its long-term average. Correlation between sectors, in contrast, has been heading lower and now stands at just 52 per cent – meaning sector indices move in tandem with each other only around half the time – versus the long run average of 69 per cent.
Economies and central banks around the world are moving in lock-step with each other. Andrew Cole argues that choosing the right sectors – rather than the right regions – is now key to maximising investment returns
It’s all about the sectors
The importance of sector allocation bodes well for thematic investing
Source of all data: Pictet Asset Management, Thomson Reuters Datastream, August 2018.
Consumer-focused companies are facing pressure from changing spending habits, while nimble competition erodes margins. Those companies that can grow revenues, have more insulated margins, and are exposed to lower leverage are attractive. The fact that only a handful of high growth companies in the US have been responsible for the bulk of overall returns leaves a market which is too narrow and vulnerable. One risk that worries us, is the low expectation of defaults implied in credit spreads, given that corporate and government sectors globally are highly leveraged. Credit markets are larger today, but the ability to manage credit risk is much lower given the market structure. Private debt markets have grown as investors have sought the illiquidity premium; however during stresses this premium quickly turns into a discount and, although investors may not have to face the mark to market volatility, they cannot hide from the defaults. We attempt to identify catalysts which could cause a repricing of risk, knowing that those with the biggest ramifications defy the markets’ conventional wisdom.
Listening to companies
As we enter into the final quarter of 2018, it is clear the global economy has lost some momentum, but for the time being the level of growth is still above the trend rate. This deceleration has been more acute in Europe and China than in the United States. In the US, industrial and manufacturing sectors are growing, employment rates continue to improve and capacity utilisation is increasing. While demand for skilled workers in specialist sectors in the economy is resulting in wage gains, the jobs and pay situation is less positive for those who are unable to provide the requisite skills or can be substituted by automation. This divergence tempers the consumption picture. Tax reform has accelerated plans for business investment, but those intentions have not converted into enough action to propel growth further. The housing and construction sectors have disappointed as higher borrowing costs, along with higher house prices, have dampened affordability. Higher interest rates will require time to digest, with some consumers and businesses able to adapt more easily than others. The Federal Reserve will continue to marginally raise the cost of borrowing as the economy improves. This comes at a time when the reduction in its balance sheet is on-going, and the yields on Treasury bonds have been rising. We similarly expect, should the economy start to feel the brunt of high interest rates, that the Fed will err on the side of caution. Some measures of monetary conditions suggest that, once the impact of quantitative tightening is taken into account, the cumulative removal of monetary accommodation is equivalent to the average tightening cycle the US economy has seen over the past 80 years. However with US economic growth stable and inflation rising, the hurdle for a pause in monetary policy tightening is high. Political cracks in the foundations of Europe have re-emerged in 2018, having been masked by better than expected economic growth in 2017. Given the high levels of debt in Europe, the continent is much more dependent on economic growth than other regions. This is not just the case with respect to budget deficits and the constraints they put on governments, but also applies to corporates whose balance sheets are highly operationally geared. We observe higher risk premia on European assets than elsewhere and would suggest this is a function of political uncertainty. Unlike several years ago, when populist parties were just fringe movements, they are now increasingly setting the agenda, which is inevitably more domestically focused. So politics continue to weigh on European markets’ ability to outperform. Elsewhere, the work we have done suggests that many emerging economies have improved their economic positioning. Even China, where we now see nascent signs of economic stabilisation. This bodes well for the entire emerging complex, with domestic demand and corporate profitability holding up well. We have espoused Japan’s improving corporate sector and sustained earnings for some time. Its companies are relatively insulated from margin threats. Looking at the cyclical sectors, these trade at a large discount to their global peers, and have much less leverage, which is favourable as the interest rate cycle progresses. The performance of the market has been lack lustre given these attributes. However, any resurgence in risk appetite, and tempering down of global trade fears should lead to renewed investor appetite.
On the lookout for opportunities in Europe, EM
Where are the opportunities?
Globally, economic growth is progressing as expected, albeit with downside risk hinged primarily on the global trade tussle. And higher interest rates will take time to digest, writes Shaniel Ramjee, Senior Investment Manager Multi Asset at Pictet Asset Management
Not over yet
We still see this as a transition phase in the global economy and financial markets, and we are not yet prepared to call an end to the cycle. The synchronicity of 2017, however, has given way to divergent economic and political policy in 2018. The primary players are the US and China, and understanding this relationship remains paramount. The apparent recognition by the US that China is now a strategic competitor for resources and technology will increasingly drive fluctuations in policy. This is likely to accelerate should midterm congressional elections in the US this November prove less damaging than expected for Donald Trump and the Republicans. Given the divergence of economic policy across the world, identifying changes in growth expectations takes on greater importance. Our strategy focusses on being prepared for volatility within financial markets, being selective, nimble and granular enough to avoid the casualties of these tensions and on picking out opportunities for recovery as they occur. As ever we are prepared to make meaningful changes to the portfolio to ensure that through time we deliver high real returns whilst seeking to minimise downside risk. We have at our disposal the ability to look across the entire capital structure of the markets. We are more cautiously invested today than we have been over the last 12 months (if you exclude the period in January and February when we took precautions against a sharp sell-off in markets from overbought conditions). We are mindful that the run of negative economic surprises that have been a headwind year to date is about to abate. Thus we remain vigilant but have cash and capacity to add risk to seek higher returns as and when they become available.
In China we see nascent signs of economic stabilisation
Find out more
For more information about our market views and asset allocation, click here
Our investment process has evolved over decades and been tested in virtually every market environment. It integrates insights from our Cyclical Forums, which anticipate market and economic trends over the coming six to 12 months, and the annual Secular Forum, which projects trends over the coming three to five years. These top-down views are complemented by bottom-up perspectives from specialists and quantitative analysis of individual securities and portfolio construction. The Investment Committee, which is composed of senior investment professionals, drives decision-making on a daily basis.
Shaniel joined Pictet Asset Management in 2014 as a Senior Investment Manager in the Multi Asset London team.Previously Shaniel worked at Barings Asset Management as an investment manager in the Global Multi Asset Group for 7 years.Shaniel holds a MSc in Finance from the University of St. Andrews and a BA Hons in Economics and International Business from the University of North Carolina at Chapel Hill (US). Shaniel is a Chartered Financial Analyst (CFA) charterholder and holds the Investment Management Certificate (IMC).In 2016, Shaniel was one of Financial News’ 40 under 40 Rising Stars in Asset Management.
Shaniel Ramjee
Senior Investment Manager, Multi Asset London
Andrew joined Pictet Asset Management in 2014. He is head of the Multi Asset London team and has 39 years investment experience. Previously Andrew worked at Barings Asset Management where he was lead manager of the Barings Multi Asset Fund and a number of segregated portfolios. He joined the Fixed Income department at Barings Asset Management in 1986 and was appointed a Director in 1994. He joined the Multi Asset Portfolio Group in 1996.
Andrew Cole
Head of Multi Asset London
Meet the Pictet team
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