APRIL 2017 | LEADING EDGE | 17
Industrial Metals
RECOVERY
OVERHEAT
UMER DIS ONS CR &C ET IO
REFLATION
COMMODITIES
BONDS
CASH
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M
,S
S IE
TA P
IT
Government Bonds
STOCKS
CE N
Softs
FIN A
Corporate Bonds
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GROWTH MOVES ABOVE TREND
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LOGY & INDUSTR NO IAL CH S TE Y AR N
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However, it is important to note that while we believe that our models and templates are a good guide, we do not stick to them
INFLATION RISES
C
Respecting other drivers
The Investment Clock
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The next stage of the TAA process consists of fundamental analysis: establishing the current stage of the business cycle, based on monetary policy and other macroeconomic and political factors. From our reading of the tactical models and fundamental analysis, we create an implementation template, which sets out asset and geographic allocation.
For example, despite the business cycle having been in ‘overheat’, for a number of
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Our active TAA process consists of a systematic, research-led framework overlaid with experience and judgement. Based on quantitative models that simulate the added value that different asset allocation strategies have achieved since 1992, our Investment Clock model shows which asset classes tend to perform well, and which are likely to struggle, during the various stages of the economic cycle, which is driven by growth and inflation. For example, according to the Investment Clock, stocks tend to perform best during periods of ‘Recovery’, when inflation is weak but growth is improving, while commodities tend to perform well in the ‘Overheat’ stage, when growth is strong and inflation is rising. Back-testing of the investment clock over a 40-year period shows that the theory is been borne out in real-life.
From a multi asset perspective, we believe there are three main drivers of global markets in 2017. Firstly, growth and inflation pressures are building, while central banks are maintaining low interest rates. This is an environment which favours stocks over bonds. The second driver is the ‘lone hiker’ scenario: the Federal Reserve is the only central bank
IALS & ENE TER RG MA Y
Mirror, signal, manoeuvre
Current driving conditions
slavishly. Perhaps the most important part of the process is relying on our team’s collective expertise and experience to identify and take action where there are market or economic factors that may impact our models in an unexpected way.
LES
, H E A LT
R HCA
Precious Metals
E&
UT
IL
High Yield Bonds
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Energy
InflationLinked Bonds
GROWTH MOVES BELOW TREND
Our multi asset investment process combines strategic and tactical methods. Using strategic asset allocation (SAA), assets are allocated with the aim of maximising long-term returns according to a Fund’s return goals and risk tolerance parameters. SAA ensures the Funds are diversified across an efficient mix of return-seeking assets such as equities and property, and assets that are resilient to shocks such as gilts, while avoiding exotic or expensive investments. We then use active tactical asset allocation (TAA) to add value over the short to medium term by moving money towards assets that we consider currently to be attractive in relative terms. Using this combination of SAA and TAA, our GMAP funds seek to offer equity-like returns for a fraction of equity volatility over the long term.
STAGFLATION
INFLATION FALLS
As at 31.03.2017
months, we have only just recently moved to an overweight position in commodities as, despite strong ‘buy’ indicators from our models, significant US dollar strength is a headwind for commodities. However, commodities have proved resilient in the face of continued dollar strength, and supply and demand fundamentals are improving. We are overweight stocks versus bonds. European stocks tend to do well when the world economy is strong but we have held an underweight position in Europe since Brexit, owing to political risk. However, we continue to monitor the political outlook in Europe, and may close our underweight if an intensification of political nervousness causes a dip in the market. We are overweight Japan and we are underweight US and Europe. We are positive on the US and commoditysensitive Australian dollar versus sterling, the euro and yen.
to be raising rates. This is good for the US dollar and strong dollar beneficiaries, such as Japan. Finally, political risk will create opportunities to buy during this extended equity rally. Despite some recent cooling, while global monetary policy stays generally loose, we believe stocks still have further to climb. Arriving safely at your destination The GMAPs benefit from the actuarial rigour that comes with Royal London’s multi asset heritage and Trevor Greetham’s strong performance record and could be well suited to investors seeking smoother returns across a number of economic scenarios. The range aims to maximise real returns within an appropriate risk level. By combining robust SAA with research-led TAA and judgment, we aim to map a smooth journey towards improved outcomes for investors.
Past performance is not a guide to future performance. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the manager’s own and do not constitute investment advice.