We have just updated our capital market forecasts for the end of July. I thought it would be worthwhile to share with you some of the key themes that came out of this process, and how those are then translated in terms of asset allocation across our multi-asset portfolios.
Capital markets work is an important part of our overall investment process, as it allows us to formulate a view on our forecasts for financial market returns. We update this every quarter, and ultimately, it feeds into our asset allocation framework. It informs the way we build out multi-asset portfolios, and the way that we aim to construct them – both in terms of looking for investment opportunities, and how we can better manage risk across the market environment.
As you can see in the below table and charts, we continue to remain constructive on equities relative to bonds. We have a largely positive outlook when considering the return profile, relative to the more interest-rate-sensitive sectors across the equity market environment. This applies whether it be REITs and/or fixed income directly, as well as cash.
We feel that the more defensive asset classes – those that have performed exceptionally well over the last 12-18 months – are most likely going to struggle through the recovery phase, as bond yields start to move higher. This may be still some way away, but when it comes to positioning portfolios, we still believe that the outlook is not as strong as what we would expect, compared to equity asset classes or broad-based investments.
The second chart below highlights that difference in terms of how we have been positioning portfolios. It demonstrates that through the work that we have done, we have a positive outlook for equities. Therefore, across our portfolios, we are carrying slightly higher allocation to domestic and global equities. We are also focusing on other parts of the market that have a growth characteristic, particularly around infrastructure and real assets. We believe these can continue to add to a portfolio framework, both in terms of the capital and from an income perspective.
The second point to note is that while overweight equities can be considered growth assets within our investment portfolios, we clearly are underweight in more defensive parts of the investment market. This is predominantly through REITs, interest rate sensitive sectors in that context, as well as fixed income and cash.
The fixed income component is noteworthy, because as the table to the left of the chart demonstrates, we still had nearly 20% of the portfolio invested in fixed income. We still believe it plays an important role, from an overall portfolio framework perspective, in buffering portfolios during extended market volatility, or a significant sell-off in equity markets.
Equally, it is important to note that in the context of our portfolio, we are certainly not out of REITs – whether these be domestic or global. We are just holding a smaller allocation than what we normally would.
The overall framework of a portfolio from our perspective is critical. Regardless of whether we are over- or underweight in a particular asset class, it is important to have diversity and exposure to broad-based investments within a portfolio. This allows us to deliver both in upward and downward market environments.
The final asset class where we continue to hold an overweight position is within the alternatives. From a portfolio standpoint, our approach here is to try to deliver a return profile that is not necessarily linked to either fixed income or equity market environments. Within our overall alternatives framework, we do have exposure to both growth and defensive alternatives – this allows us to provide a balance across an overall portfolio-based solution.
We believe that providing this balance can, in turn, provide opportunities that can continue to evolve as we move through the second half of this year and into 2021. Despite the challenges that we are seeing in regards to broader-based economic activity, we believe that having a focus on medium to longer-term growth is a really important part of delivering on portfolio objectives, but ultimately ensuring that you can capture that accumulation through time.
Piers Bolger is Chief Investment Officer at Viridian Advisory
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