One of the tenets of multi-asset investing is the diversification that it provides, and with it the ability to weather various economic situations.
As Dean Cook, multi-asset portfolio manager at Aviva Investors, says, the strategic asset allocations for each of its multi-asset portfolios are designed with a range of economic, and by extension inflation, scenarios in mind.
“Real assets offer a degree of protection, often benefiting from inflation-linked cash flows,” he adds. “While other assets that generally have little to no correlation with either equities or fixed income, such as gold, can come into their own during periods of elevated uncertainty.”
Tactical asset allocation also offers flexibility to identify pockets of the market that may benefit from periods of higher inflation, Cook says.
“This could include equity sectors that benefited from the supply-side shortages during the reopening from Covid, such as energy, or others with strong pricing power and resilient earnings, like healthcare.”
Although multi-asset portfolios are therefore typically built with inflation in mind, various economies have recently seen inflation reach multi-decade highs.
The UK, for example, saw inflation hit a 41-year high of 11.1 per cent in October.
Periods of high inflation are detrimental to the performance of financial assets, says Max Macmillan, investment director and head of strategic asset allocation research at Abrdn.
“[They] suffer either the inflation itself, as in the case of fixed income, or the subsequent policy response, as in the case of equities and real assets.”
It is hoped that inflation rates will return to low and stable figures in the foreseeable future; the Bank of England expects inflation to meet the 2 per cent target by late 2024.
But has high inflation had a more lasting impact on the way managers approach multi-asset investing?
Sonya Dilova, deputy chief investment officer at Omnis, says the asset manager’s approach remains “anchored” by multi-asset investments that provide risk diversification and downward market protection.
“Multi-asset investing implies that you don’t put all your eggs into one basket. This approach allows investors to mitigate macro risks, such as inflation, growth and interest rate policies, and micro, such as stock-related, risks.
“Since 2021, the average inflation in the UK was 6 per cent. For the same period, a multi-asset portfolio consisting of 40 per cent equities, 35 per cent fixed income, 10 per cent alternatives and 5 per cent cash delivered a 6.5 per cent return.”
At Momentum Global Investment Management, portfolio manager Richard Parfect likewise says that, as valuation-driven value investors, the arrival of high inflation by itself does not change MGIM’s approach to investing, namely maintaining a diversified approach by asset class and individual investment.
But Parfect adds that the impact of high inflation on valuations, not least the significant increase in government bond yields and the secondary impact of that onto risk assets, has led the investment manager to make some changes.
