MARKETS & INVESTING
In reality , of course , this is easier said than done , as a client ’ s risk tolerances might not permit such a shift . We therefore need to utilise other approaches to asset allocation . This means we need to think creatively . We need to construct multi-asset portfolios in ways that embed flexibility and can better enable us to navigate uncertain times . In short : we need to consider the bigger picture . Below are some key examples of this thinking .
Geographic diversification Just as they can benefit from diversifying across asset classes , investors can benefit from diversifying across regions . It may now be especially useful to pay attention to how different regions are valued versus both their own history and other regions . Home bias – the tendency to invest the majority of a portfolio in domestic assets – is still widespread , even though such an approach ignores geographic diversification ’ s potential to help maximise opportunity and minimise risk .
Smaller companies While many investors ’ views of the equities universe are limited to large-cap businesses , the small-cap space is home to some of the most promising opportunities to be found anywhere on the market-cap spectrum . Small-caps are often under-researched and under-owned , and they routinely outperform their large-cap counterparts over time – even though they are likely to be more volatile over the short term .
Superior sources of income Looking further afield and digging deeper can help address the issue of income , too . This is because income can also vary across
regions and sectors . This point also applies to fixed income , where assets such as high-yield bonds are gaining more attention – although risk considerations must obviously be taken into account .
Alternative asset classes We should not forget the investment universe extends beyond equities and bonds . Alternative asset classes include real estate , commodities , hedge funds and private equity . While not every investment is suitable for every investor , it is vital to understand markets are non-homogenous and a healthy blend can therefore help a multi-asset portfolio perform consistently , not least during periods of uncertainty and volatility .
Active management A traditional 60 / 40 portfolio is invested passively . Going forward , with greater volatility expected , the role of active managers in attempting to identify likely winners – and , perhaps even more importantly , avoid likely losers – could become more significant . Active management can be particularly helpful when the differential between best-performing and worst-performing sectors becomes unusually stretched , as is the case at present .
Why diversification matters The chart below may appear daunting , but its message is simple : markets are non-homogenous . The same asset classes rarely lead the way in performance year after year , even when the geo-economic and geopolitical environment is relatively benign . This underscores the value of looking further afield and digging deeper when constructing a multi-asset portfolio .
Past performance is not a guide to future returns . Source : Bloomberg , as at 31 December 2023 . Total returns in GBP . Indices used : MSCI USA ( US Equity ), MSCI UK ( UK Equity ), MSCI Europe ex UK ( European Equity ), MSCI Japan ( Japan Equity ), MSCI Emerging Markets ( EM Equity ), Bloomberg Global Treasury Total Return ( Global Treasury ), Bloomberg Global Aggregate Credit Total Return ( IG Credit ), Bloomberg Global High Yield Total Return ( HY Credit ), Bloomberg EM USD Aggregate Total Return ( EM Credit ), S & P Global REIT ( S & P REITs ), HFRX Global Hedge Fund ( Hedge Funds ), Bloomberg Commodity ( Commodities ).
Find out more Invesco ’ s heritage in managing multi-asset investments for our UK clients goes back over 25 years . Explore our range of advisory model portfolio services on our website which consider the topics discussed in this article , and turn our expertise into your edge . invesco . com / mps
Investment risks . The value of investments and any income will fluctuate ( this may partly be the result of exchange rate fluctuations ) and investors may not get back the full amount invested . Important information . This article is for Professional Clients in the UK and is not for consumer use . Views and opinions are based on current market conditions and are subject to change . This is marketing material and not financial advice . It is not intended as a recommendation to buy or sell any particular asset class , security or strategy . Regulatory requirements that require impartiality of investment / investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication . Invesco Asset Management Limited , Perpetual Park , Perpetual Park Drive , Henley-on-Thames , Oxfordshire RG9 1HH , UK . Authorised and regulated by the Financial Conduct Authority .
# 11 | SUMMER 2024 | 39