INVESTMENTS & PENSIONS
When these structural shifts in interest rates and inflation occur , it is vital that managers of multi-asset strategies actively manage their asset allocation to minimise correlation between interest rate sensitive equities and bonds . If done successfully then this will be a large determining factor in achieving longer-term outperformance of peers and benchmarks .
In 2021 , the Brooks Macdonald Risk Controlled MPS had begun to utilise a barbell strategy within the equity allocation of the portfolios , reducing exposure to global small cap funds and high-growth US equity strategies in favour of an increased allocation to large cap UK equities and to Asia ex-Japan equities . This was done with the aim of constructing a portfolio with a balance between equities that perform well when interest rates and inflation are low and those that fair better when interest rates and inflation begin to rise . For example , the UK stock market is dominated by large , global companies operating in the Commodities , Energy and Materials sectors which have immediate cash flows with a shorter duration making them less sensitive to higher interest rates . In contrast growth stocks and smaller companies are expected to deliver a higher proportion of their earnings in the more distant future . This impacts their equity valuations if future earnings are discounted to present value using a higher interest rate . In this sense they share characteristics with longer-dated bonds and therefore these two assets do not offer much by way of diversification if held in large amounts within a portfolio .
GRAPH SHOWING RETURN OF MSCI US GROWTH , MSCI SMALL CAP AND BLOOMBERG GLOBAL GOVERNMENT BOND IN 2022
105
100
Total Return ( GBP ) %
95
90
85
80
Bloomberg Global Aggregate 1-5yrs Index TR £ Hedged Bloomberg Global Aggregate Index TR £ Hedged
Source : Bloomberg . period shown from 31 / 12 / 2021 to 31 / 12 / 22022 TR denotes total return GBP denotes pound sterling data to 31 / 12 / 2022 Past performance is not an indicator of future returns .
Within the fixed income allocation of the portfolios , the Risk Controlled MPS had begun to move overweight to short-dated bond funds , particularly in the UK . Shorter-dated bonds have a lower duration than their longer-dated equivalents meaning their prices will fall to a lesser extent if interest rates rise sharply and offer better capital protection during this period of rising interest rates . Shorter-dated bonds are also less impacted by the effect of higher inflation reducing the real term value of their fixed coupon payments .
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