pollo Multi-Asset Management has highlighted the need for a forward-looking approach to asset allocation rather than “navigating by the rear-view mirror”.
The firm is particularly concerned with allocations to fixed interest in the construction of portfolios managed to a cautious risk profile. It says the traditional approach, where fixed interest is used to provide stability in cautious portfolios, will be challenged in the future because the trend upon which this asset allocation decision is based is about to reverse.
It observes that fixed interest has been in a bull market since 1981, with prices going up while yields have fallen. It says traditional cautious managed portfolios have relied on bonds to do well when equities struggle, due to an inverse correlation between those asset classes. But any reversal will be bad news for these portfolios because fixed interest and equities could fall together, which would increase volatility.
Due to its expectations that this year will be difficult for fixed interest, Apollo recently sold out of its balanced fund’s holding in the Old Mutual strategic bond fund. Bonds comprise less than 10 per cent of the Apollo balanced and Apollo cautious funds.
Apollo believes a broad multi-asset approach that combines uncorrelated asset classes is needed in these circumstances and a forward-looking approach is vital because making allocations on historical performance and correlation of asset classes could lead to an inappropriate and excessive allocation to fixed income.
Partner and fund manager Steve Brann says: “It is as if these rear-view approaches to asset allocation only ensure a client is in the wrong asset class at the wrong time. We adopt an eight-asset-class approach combined with forward-looking asset allocation and selection of the most appropriate vehicle to control the risk.”