Multi asset funds: September 2022

Summary

  • The UK took centre stage over the month with the election of the new Prime Minister, Liz Truss. In the first month of her inauguration, a fiscal stimulus plan and energy price caps were announced. 
  • Federal Open Market Committee members lifted their dot plot projections for 2023, despite the federal funds futures market pricing in interest rate cuts next year amid concerns over economic growth transitioning to a below-trend state.
  • The real safe haven continues to be the Dollar, which tends to benefit from both tightening global financial conditions and risk-off events.
  • Japan intervened in their currency market in an attempt to stabilise the Yen’s depreciation. 

Market update  

The UK took centre stage over the month with the election of the new Prime Minister, Liz Truss. In the first month of her inauguration, a fiscal stimulus plan and energy price caps were announced with the view to alleviate some inflationary pressures that have eroded the real purchasing power of the consumer. Unsurprisingly, these policies led to a sharp depreciation of the pound as contrary to their intended purpose, they keep inflation elevated for longer by attempting to increase income levels. Additionally, these types of policies stoke second-round inflation effects. As a result of the announced tax cuts, the Bank of England intervened by buying longer dated bonds to suppress the sharp re-pricing in gilts over the month, to foster some sort of financial stability. Shortly thereafter, tax cut announcements have since been rescinded to restore confidence back in the economy. It is worth noting that sizeable accommodative fiscal or monetary policies will undoubtedly keep inflation entrenched in the UK. The primary means to quell the inflation trajectory is either through supply-side reform, particularly in the energy sector, or if the demand-side of the economy cools.   

Several central banks around the world lifted their key policy rates over the month and some noteworthy projection changes took place. For instance, the Eurozone Central Bank surprisingly lifted their economic growth forecast to 3.1% this year from 2.8% previously, despite rising economic headwinds in the energy sector, although estimates were downwardly revised in the outer years. However, at this juncture, investors’ focus is predominantly fixated on the US Federal Reserve’s monetary policy outlook, to determine how swiftly the world’s largest central bank is able to tame inflation. The resultant impact on economic growth and company earnings will likely determine the direction of asset classes going forward. In their latest projection material, the Federal Open Market Committee (FOMC) revised Personal Consumption Expenditure inflation forecasts yet again throughout the forecast horizon and is now projected to come in at 5.4% this year (5.2% previously). GDP estimates were lowered to just 0.2% this year from 1.7% previously. Most importantly, however, FOMC members lifted their dot plot projections for 2023 despite the federal funds futures market pricing in interest rate cuts next year, amid concerns over economic growth transitioning to a below-trend state.

Haphazard policy pronouncements, particularly in the UK, combined with an increasingly aggressive tightening stance by global central banks led to a selloff in both equities and bonds over the month. The real safe haven continues to be the Dollar which tends to benefit from both tightening global financial conditions and risk-off events. The countercyclical nature of the Dollar offers better risk adjusted returns relative to other asset classes in times of heightened uncertainty in the global economy and we prefer to take less risk. Accordingly, currency interventionism by regions such as Japan will likely do little to stabilise the depreciation of the Yen as their central bank remains on an accommodative monetary policy path.    

On the emerging market front, China continues to display mixed signals with easing on the monetary policy side amid well contained inflation levels, although lockdowns continue to prevent a sustainable recovery in economic growth. At this stage, we remain cautious, although valuations are looking cheap, and we expect opportunities to emerge in the coming months.    

Ashburton Global Balanced Fund Multi asset fund targeting capital growth within a moderate risk strategy. Learn more
Ashburton Global Growth Fund Multi asset fund targeting capital growth Learn more
Ashburton Sterling Asset Management Feeder Fund Distributing Steady returns through all conditions Learn more

Fund strategy

Our primary concern going forward is whether the resilience of company earnings can be extrapolated into the future. We believe that this may prove difficult as fiscal and monetary policy, particularly in the US, will likely be on a restrictive path. In particular, the lagged effect of tightening monetary policy actions will likely begin to filter through to changes in consumer behavioural patterns. Higher borrowing costs for both businesses and consumers will likely supress economic activity, particularly in discretionary related areas, as economic agents look to rein in expenditure to tighten their balance sheets and income statements. Households are utilising various credit instruments, particularly credit card debt which is currently at all-time highs, to prop up short term expenditure prospects. Accordingly, we believe lowering the equity beta in the Ashburton Global Multi-Asset Fund range has been the appropriate response to the current operating environment as we head into the new year. We are of the view that economic growth and company earnings expectations are currently too optimistic. We prefer sectors with less earnings cyclicality and have a strong Dollar bias. On the fixed income side, we maintain our underweight duration position amid tightening monetary policy dynamics due to elevated inflation levels.  

Fund performance

The USD Global Growth and Balanced Fund fell 6.6% and 5.5% respectively compared to the Morningstar peer groups which declined 7% and 6% for each respective fund. These funds continue to have a defensive tilt and remain in the first quartile year-to-date and over a one-year period. The Sterling Asset Management Fund, which has the highest fixed income weighting in the multi-asset fund range, declined 5.2%. Overall, we continue to remain vigilant by keeping the overall fund beta at lower levels compared to the majority of last year amid a highly volatile and uncertain economic environment.