Navigating market volatility the global multi asset way

23 April 2022

Without a doubt, the global lockdowns in early 2020, in response to the Covid-19 pandemic led to a volatile investing environment. At Ashburton Investments, we believe that when it comes to navigating market volatility, a forward-looking and dynamic approach to asset allocation is best. Heading into 2022, we are seeing a less favourable outlook for US economic growth.

Without a doubt, the global lockdowns in early 2020, in response to the Covid-19 pandemic led to a volatile investing environment. Equity markets were quick to price in the economically devastating effects of the shutdowns and had the quickest peak-to trough declines in history, plunging by more than a third in less than a month. The subsequent recovery was as swift, clawing back the entire loss in merely six months.

It is worth noting that the economic contraction was unprecedented as US nominal gross domestic product (GDP) year-on-year fell 8.5% in the second quarter of 2020, although the recovery was equally as remarkable with growth surging 16.8% in the corresponding period in 2021.

The speedy recovery in equity prices can not only be ascribed to a strong recovery in consumer demand as Covid-related restrictions were removed, but also to the most supportive monetary and fiscal policy by global authorities on record. In fact, the US Federal Reserve (Fed) slashed the Federal Funds Rate from the upper bound target rate of 1.75% in January to just 0.25% by the end of March 2020. At the same time the Fed initiated an extraordinary quantitative easing programme which saw its balance sheet more than double from slightly more than US$4 trillion before the pandemic to a little shy of US$9 trillion two years later.

The strong US economic recovery in 2021, combined with stubbornly high inflation (January 2020 Consumer Price Index of 7.5% year-on-year), resulted in a hawkish monetary policy stance by Federal Open Market Committee members.

Now, as we navigate our way through 2022, the withdrawal of liquidity from financial markets (as the Fed starts the process of quantitative tightening) is likely to lead to further market volatility.

This is an environment in which we believe a well-diversified global multi asset portfolio that is both forward-looking and dynamic in its asset allocation should stand out from its peers.

ASSET ALLOCATION ADVANTAGE

Most modern-day approaches to asset allocation have evolved from the origins of modern portfolio theory (MPT) and the meanvariance framework set out by economist Harry Markowitz in 1952. Markowitz’s mean-variance framework demonstrated the concept of diversification by constructing portfolios using various uncorrelated instruments to build a portfolio with the same level of expected return but with a reduced level of risk when compared to the sum of its parts. One of the most common asset allocation tools to come out of MPT is the mean-variance optimisation model, which allows investors to identify the optimal portfolio mix that maximises the expected return for a given level of risk.

While this approach is used as a starting point for asset allocation, it is backward looking and extrapolating the inputs can make expected return, risk and correlations unreliable. The nonlinearity of markets must be embraced in a suitable framework that gives true diversification potential that is relevant for the future state of the investment climate.

At Ashburton Investments, we believe that when it comes to navigating market volatility, a forward-looking and dynamic approach to asset allocation is best. Accordingly, we put more emphasis on asset allocation tools such as the Black-Litterman model, which allows our teams to incorporate their own market expectations and confidence levels for various scenarios.

ART AND SCIENCE

While the use of quantitative tools, such as the Black-Litterman model, provides a framework for making asset allocation decisions, the real art comes from understanding the business cycle in the context of global fiscal and monetary policy and then identifying key fundamental macroeconomic trends driving asset class returns. Ultimately, these key macroeconomic trends create the inputs to our dynamic asset allocation process.

For example, the strong rebound in US economic growth paired with significantly easy monetary and fiscal policy in 2021 resulted in the Ashburton Global Multi Asset Fund range being maximum overweight equity within our predefined risk parameters for much of last year. This included a notable bias to economically sensitive US equity sectors such as energy and financials while being underweight duration within fixed income.

Heading into 2022, we are seeing a less favourable outlook for US economic growth. This, combined with tighter monetary policy, means that asset allocation across the fund range is far more neutral with a specific underweight to US equities and an overweight to less highly valued Southeast Asian equity regions that have a much more favourable growth backdrop.

The fluidity of our approach, which includes being contextually aware of the various macroeconomic cycles, gives us an edge over our peers and enables us to deliver suitable risk-adjusted returns for our clients.

Both the Ashburton Global Balanced USD I share class and Global Growth USD I share class outperformed their respective Morningstar peer groups in 2021. The Ashburton Global Balanced Fund returned 9.95% compared to the Morningstar EAA Fund USD Moderate Allocation peer group of 7.26%, while the Ashburton Global Growth Fund returned 13.87% against the Morningstar EAA Fund USD Aggressive Allocation peer group of 11.63%.

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