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Asset action

Volatility can be unnerving for invest-ors. It is not necess-arily bad news – prices can go up as well as down – but navigating such terrain can be challenging. By looking beyond the shorter-term noise and identifying long-term trends, market volatility can be made easier to live with.

T Bailey undertakes a review every three years, in which we step back from the noise of everyday market movements, identify key investment themes and build a long-term strategic asset allocation.

As a result, it has long been obvious to us that sustained growth will come from the emerging markets. Traditional asset allocation models that look purely at market capital-isation and historic data will likely underplay the region.

But we do not believe investors can afford to ignore this theme. Within our global growth fund we have a 17.5 per cent benchmark exposure to emerging markets, along with a 10 per cent exposure to Asia ex-Japan – another region we expect to see deliver superior long-term growth.

A suitable strategic asset allocation is likely to make a significant contribution to long-term returns and helps multi-managers negotiate the fog of mixed market messages.

It is also good to squeeze extra returns from shorter-term responses, reducing risk when necessary and exploiting opportunities. We have the flexibility around the strategic benchmark to go under or overweight between regions and asset classes within our multi-asset funds.

Our global growth fund has been underweight emerging markets in past months. Towards the end of 2010, we felt China’s stockmarket was turning a blind eye to the threat of rising inflation and getting ahead of itself.

The conflict in Egypt at the start of 2011, which spread across North Africa and the Middle East, added to nervous-ness surrounding political risks and saw emerging market weakness continue.

The political situation in many emerging regions remains uncertain but extreme fears have subsided. Govern-ments in countries such as China have acted to curb inflation and the introduction of austerity measures and quantitative tightening in other regions of the world will further dampen pressures.

The very real risks have been sensibly absorbed into emerging markets’ equity prices and it is now an appropriate time to revisit the region and bring our asset allocation closer to the strategic benchmark.

Active asset allocation is a real strength of the multi-manager model. All good multi-managers will base these important decisions on detailed research and analysis. We do it so you don’t have to.

Elliot Farley is the manager of the T Bailey defensive cautious managed fund


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