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Get ready for three years of volatility, managers warn

Despite the unlikeliness of a recession in the near future, multi-asset managers emphasise the importance of diversifying funds and finding opportunity in periods of volatility

Get ready for three years of volatility, managers warn

2019 will be ‘the year to get your house in order, and get ready for a recession’, says Trevor Greetham, head of multi-asset at Royal London Asset Management (RLAM). ‘The key is having the right stuff in portfolios; having the right process and having the right risk.’ 

Speaking at New Model Adviser®’s Conference and Awards 2019 at the beginning of January, multi-asset managers discussed the importance of diversifying funds and finding opportunity in periods of volatility.

While a recession is not expected in the near term, volatility will persist. Greetham says: ‘Volatility is very much here to stay, and I think we are at the beginning of a period of volatility that could last two or three years.’

Last month, RLAM launched a defensive multi-asset fund for Greetham, which aims to lower downside risk and reduce exposure to riskier assets during these turbulent times.

Diversify with care

Greetham says market changes caused by Brexit can be hedged against with diversification. For investors with higher risk appetites, he says: ‘I think there is a benefit in having commercial property and equities together because of Brexit.

‘The two asset classes are likely to move opposite to each other whatever happens, so that gives you a bit more diversification around Brexit specifically.’

However, he warns: ‘This doesn’t mean banging the drum about exotic asset classes.’ Exotic and expensive investments such as aircraft leasing and peer-to-peer lending are not within Royal London funds.

Legal & General fund manager Chris Teschmacher (pictured above) says the market is currently pointing towards premature recession fears. But he says there are still opportunities, and investors should not look to completely withdraw all exposure to risk.

He says: ‘It is a case of small doses at the right opportunities, certainly not often and in large quantities. All of these political risks seem scary and worry people, making them think they should take risk off the table.

‘Sometimes that is the right response, but sometimes it means throwing out opportunities, throwing out assets that are now too cheap. If I can buy a small amount in my fund, I can make a profit. And if you can do that, small and often, you’ll be making money.’

In his own portfolios, such as the Multi-Asset Target Return range, Teschmacher says: ‘We make sure we cover the globe. We cover every asset class and every region with our team of specialists, and we do not fall into the trap of availability and recency bias. We aim to be diversifying [with] correlations of less than 0.4.’

He also uses so-called smart hedges: insurance, typically through equity but also protection. ‘Every year we expect to use 50 basis points on buying insurance. But on occasions where there are downturns in markets, that is going to help us. In 2015, 2016 and 2017, we lost money on risk hedges but, in 2018, we made 1% towards the end of December on risk hedges, positive gains for insurance.’

He adds: ‘There are other smart hedges that help as well, such as yen and gold. These help in negative market environments.’

Investment strategist for the Invesco Summit Growth range, David Aujla, says it is key to diversify within asset classes, not just across them. For example, in alternatives, Invesco’s multi-asset fund holds real estate, global macro and absolute return.

Aujla says: ‘If we are looking at European equities, for example, we probably have about 40 different vehicles to choose from.’

He adds managers should ‘take advantage of market opportunities in between cycles, in the tactical process’. Invesco’s multi-asset fund has its own risk team and risk managers dedicated to this.

While market forecasts will not always be completely correct, Aujla says, a ‘sensible framework’ in place to ‘optimise portfolios’ is important.

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