Advisers with a client who, after the appropriate screening, was deemed to have a low-risk tolerance once had the option of placing the bulk of the client's portfolio into government bonds, some in cash, and equities that might reasonably qualify as 'blue chip'.
But the events since the global financial crisis have called those easy assumptions into question. And 2022 year-to-date has further contributed to the uncertainty, with those assets delivering highly volatile outcomes.
James Beaumont, multi-asset investor at Natixis, says the challenge for investors this year is that “the risk assets and the low-risk assets are correlated, which obviously is not supposed to happen. But it won’t last forever”.
Many market participants are used to thinking in terms of economic cycles, according to Kevin Thozet, multi-asset investor at Carmignac, but “since 2010 it has not been a normal cycle, it has been acyclical.
"What we are experiencing now is the start of a more normal cycle, and so over the longer-term our view of markets is not that different relative to history because this is closer to normal."
Guillaume Paillat, who runs a cautious multi-asset portfolio at Aviva Investors, says: “Clients in this portfolio have been on the phone to us, asking us what is going on. They are very concerned because this year has not been what they signed up for.”
He says the central bank policies of quantitative easing “front loaded the returns from government bonds. We got years worth of returns in a short space of time. What has happened this year is, we have effectively given back those years of front loaded returns in a very short period of time”.
Diversification
David Coombs, head of multi-asset at Rathbones Unit Trust Management, says: "Government bonds are a tactical and not a strategic investment in a cautious portfolio. There is a right time to own them, which is when bonds are not correlated to equities, and a time not to own them, which is when they are correlated.
"Given where yields are now, we are buying government bonds. But until recently we were not."
His approach right now is to “have diversifiers more than ever. But it’s important to have actual diversifiers – some people own [real estate investment trusts] as diversifiers, but really they are correlated with the wider economy and with equities.
"Right now, cash is a diversifier. Of course it has produced a negative real return this year, but so have many other assets, and there is nothing wrong with having some cash at hand to take advantage of opportunities that might arise.
"The other areas we like right now are absolute return funds and macro strategies, as we live in a world where a lot is happening on the macro front.
