"But also, actually you could have an overweight exposure to energy right now, in a cautious fund, that is a hiding place.”
Changing assumptions
Keith Balmer, multi-asset investor on the Universal range at Columbia Threadneedle Investors, says the error that many may make now is to change long-term assumptions about asset classes based on the events of this year.
He says that while much has happened in markets, “they should be seen as a series of shocks, mostly supply-side shocks that will pass. A cautious portfolio is designed to provide some return but also to have capital protection.
"Government bonds have historically helped with that, and when the shocks we are seeing now dissipate, they can go back to playing that role in portfolios.
"There is also a role for cash in a cautious portfolio, but I think you have to be careful about having too much of it, because there isn’t much point in being invested if you just own lots of cash."
Balmer adds: "But what has changed is that over the past decade, if you had some US equities and be long duration on bonds, that was enough to get a decent return without taking much risk or experiencing much volatility. The factors that made that strategy compelling have changed.
"This year has been a period where everything that has done well is doing badly.”
Alternative strategies
He is sceptical of the use of alternatives such as hedge fund strategies as, while they may be uncorrelated with wider markets, “they tend to be expensive and performance has not been there. I would say as well, that many of those strategies invest using leverage and I am not sure that is appropriate in a cautious portfolio.”
Beaumont confesses to having his “highest cash position ever” in portfolios right now, and is underweight both government and corporate bonds, as well as equities.
Unlike Balmer, he is now looking at absolute return and macro hedge fund type strategies. He acknowledges the performance of these products has been weak in recent years, but says that was a function of buoyant markets.
"It was hard to justify investing in a long/short equity fund, for example, when markets are going up. In that environment, the traditional 60/40 portfolio worked very well, and it was hard to justify holding a long/short product. But now the conditions are different."
Fahad Hassan, chief investment officer at Albemarle Street Partners, says: “The issue I have with products such as absolute return funds is that they are basically designed to do what we do, build multi-asset portfolios delivering returns, but are more expensive.
