In an environment where traditional global asset classes are looking fully priced and many risks dominate the news flow, investors seeking offshore exposure may be wondering how best to go about it. It remains our view that investing in well-diversified portfolios that comprise more than just one asset class offers the most appropriate route to navigating a challenging investment environment. Here’s why:
Pressures are building
High starting valuations for developed market equities. Most developed market economies are amid a robust economic recovery that has provided tailwinds for their equity markets. These increases were stoked up by economic data that surprised on the upside as the post-pandemic recovery, fuelled by monetary stimulus, was more rapid than anticipated. Especially in the US, equity markets are looking fully priced at an index level after a record run since the market meltdown in March last year.
Prospects of higher global inflation. Savings rates are up, balance sheets are in good shape, interest rates remain low and economic lockdowns over the past year have meant significant pent-up demand is waiting to be fulfilled as conditions improve. Against this backdrop, it is not surprising that inflationary pressures are building up.
Diversification and active management as a better forward-looking strategy
With high starting valuations and the prospect of higher inflation among many risks facing global investors, we believe alpha-generation through selectively identifying attractively priced shares, in addition to diversification into other asset classes, will be a better forward-looking strategy than just owning the index. Our multi-asset class portfolios typically have exposure to 40 – 60 shares, carefully selected out of a universe of 2 500 – 3 500, which means they don’t look anything like the index or our peers. This level of diversification is hard to replicate on an individual basis.
Our multi-asset class funds are further differentiated in that we hold many investment opportunities outside the traditional 60% equity/40% bonds multi-asset portfolio to sweat every basis point of potential returns. Thus, while we continue to believe that it’s essential to have exposure to equities, it is also important to include other assets – such as infrastructure, high-yield income, global property, and absolute-return investments – in our multi-asset class funds. This is especially important in an environment where, in our view, the global bond index offers a negative real return over the next several years.
Each of our global multi-asset class funds benefits from exposure to these non-traditional assets, with the extent of their exposure in the portfolios dependent on the risk budget of the fund. This ranges from around 30% in the Global Capital Plus Fund, with a cautious risk profile, to 25% in the Coronation Global Managed Fund, a moderate risk balanced fund, and around 15% in the more aggressive Global Optimum Growth. The same funds have effective equity exposure of 24%, 55% and 80% respectively, with the balance held in cash and selected fixed-income instruments. (Exposure figures are as at end September 2021).
Building portfolios that span six asset classes and look nothing like the index takes extensive research and a significant amount of investment experience and expertise. The combination of our expertise and our robust tried-and-tested investment approach enables our multi-asset class funds to provide investors with exposure to a wealth of opportunities in traditional and non-traditional asset classes. These opportunities actively balance risk and returns to deliver on our investors’ various objectives across the fund range.
Coronation is an authorised financial services provider.