Over the course of the last decade, investors have had to cope with some extreme swings in returns from different asset classes.
With two bull markets and a bear market in equities, strong returns from property, low but stable returns from fixed income and some stellar returns from commodities, it has been difficult to know where, and when, to invest. Launched on January 22, Fidelity’s new Multi Asset Strategic fund offers a solution to this problem.
Managed by Trevor Greetham, who joined the group as asset allocation director from Merrill Lynch in January last year, the fund invests in five different asset classes – equities, bonds, cash, property and commodities.
The fund has the ability to weight exposure to each of the asset classes depending on Greetham’s view of the global economy.
“Certain funds do split their portfolio between bonds, equities and cash.” says Greetham. “However, it is unusual to add property and commodities to the mix.”
By investing in five different asset classes, Greetham says the fund has the ability to perform well in both bull and bear market conditions. This is because each asset class is lowly correlated with the other, which reduces its volatility.
Greetham says: “This is an all-terrain fund. Each of the asset classes we have selected perform differently at different stages in the economic cycle. My job is to actively decide which assets to be more heavily invested in and when. For example, in a boom market the fund is more likely to be positioned towards equities and com-modities, whereas in an economic slowdown it is more likely to be positioned to bonds and cash.”
To do this, the fund draws upon what Greetham terms the “investment clock”. This is a model that splits the economic cycle into four phases. According to Greetham, the economy generally follows a cyclical pattern of growth, where changes to inflation tend to lag economic growth.
The four phases of the economic cycle are reflation, recovery, overheat and stagflation.
The investment clock model helps to relate the phases of the economic cycle to the different asset classes and industry sectors, identifying which asset class is likely to perform better in a particular phase.
“It all boils down to working out what is happening to growth and inflation,” says Greetham. “Will growth be strong or weak? And will inflation be rising or falling? In 2001-02, the world economy was weak and inflation was falling as a result of declining commodity prices and unused capacity. In this environment, a phase we call reflation, bonds and defensive sectors perform best.
“The second phase is when economic growth gathers momentum on the easing of central bank monetary policy. However, at the same time, inflation continues to fall. This stage is called the recovery and, in this environment, equities perform most strongly. We saw this in 2003-04.”
Greetham says the third stage in the economic cycle is known as overheat. This is when growth continues to be strong but at the same time inflation starts to rise. As the yield curves starts to flatten and central banks start raising rates again, Greetham says that equities may become more volatile and that commodities tend to perform strongest.
“The last stage is called stagflation,” Greetham adds. “This is the time when GDP growth falls but inflation continues to rise. At this stage, equities suffer from an earnings’ squeeze and bonds are held back by the policy of the central banks. Cash and defensive stocks do best at this time.”
The key to making money though is to identify when an economy moves from one phase to another. To achieve this, Greetham uses a process called “nowcasting”. “The key is not to get caught up on theories of what different economies will do next year, we have to try and Continued on p50judge where we are now,” he says. “To do this, we have to monitor each of the phases all of the time and try and pick up the first hints that growth is slowing or inflation is picking up.”
To pick up these hints, Greetham says he regularly looks at a range of economic indicators. He says: “To help us do this, we use a quantitative model which includes five indicators for growth spread across four different regions in the world. This means that overall we scientifically look at 40-50 different global growth indicators, with the idea being that we are trying to judge where we are in the investment clock cycle.”
Greetham says the asset allocation of the fund will not change drastically from month to month. “It will be once or twice a year that we make the bigger changes”. He adds: “We use the economic indicators to pick up hints as to whether or not one of the four cycles has finished. A good example is inflation. It is very important for the fund for us to pick up signals that inflation is falling or that world growth is slowing. At present, the global unemploy-ment rate is falling rapidly, which is an indicator that the global economy is strong. If unemployment starts to rise, this would be a signal for the fund to become more defensive and invest more into bonds and cash.”
To assist in the asset-allocation process, Greetham will also draw extensively on Fidelity’s Global Asset Allocation Group (AAG). This vastly experienced group is made up of specialists drawn from the full range of Fidelity’s worldwide offices. The AAG is part of an international network that enables Fidelity to combine a global approach with a local focus.
Once Greetham has identified where in the cycle the economy is, he uses dynamic asset allocation to make sure the fund is invested in the right asset classes. However, economic cyclicality is not only reflected within asset classes – it can also be seen in the underlying sectors of the equity market – and so Greetham will also weight the portfolio towards those sectors most likely to do well at any given point in the economic cycle.
He says: “Different industries and parts of the world perform well at different stages in the economic cycle. When the world economy is strong, technology and basic industries do well.
“In an economic slowdown, consumer staples and utilities do better. When inflation is rising, the oil and gas sector is the best place to be and when inflation is falling, the consumer discretionaries, such as retailers, are the area to be invested in.”
In regional terms, Greetham adds that in a strong economy emerging market shares do well whereas in a weak economy he says it is better to be invested in the developed markets.
At present, Greetham says the global economy is in the reflation phase, which is when bonds and equities perform best. As a result, the fund is underweight in cash and commodities, which both perform better when inflation is rising.
“Inflation is falling on a global basis,” says Greetham. ” We do not feel it in the UK at present but global consumer inflation has fallen. In America, gasoline prices have fallen sharply and last year, US consumer inflation was more than 4 per cent but it is now 2.5 per cent.”
To get exposure to the various asset classes, the fund invests in a range of Fidelity’s own single-strategy funds. The only exception to this is commodity exposure where Greetham invests in other financial instruments.
The benchmark asset allocation for the fund, which sits in the IMA Cautious Managed sector, is 40 per cent bonds, 35 per cent equities (15 per cent UK equities, 20 per cent global equities), 10 per cent commodities, 10 per cent cash and 5 per cent in property. Greetham has the flexibility to deviate plus or minus 10 per cent from this benchmark in each asset class to reflect the most appropriate asset mix for any given point in the cycle.
To help select the right combination of Fidelity funds for the portfolio, Greetham is assisted by Fidelity’s Investment Strategies Group, who are responsible for Fidelity’s fettered fund range such as Fidelity WealthBuilder.
“They are experts in analysing fund managers and choosing the best combination of funds,” he says. “Overall, the fund will spread money across about 20 different funds.”
He adds: “A number of recently launched multi-asset funds try to provide a return better than cash by using a number of options strategies to protect the downside,” notes Greetham. “Our approach is that it is better to stay invested in the long-run so we have opted for a mix of different types of investment to provide a smoother return.”
Indeed, based on assessment of long-term returns, Greetham says the group will be happy if the fund provides a 3-4 per cent return above cash per year.
“This is designed to be a core holding for investors,” says Greetham. “All the time, we are reassessing where to invest their money and taking the decision for them as to when is the best time to move in and out of certain assets.”
So, for advisers with clients who require an instant, diversified portfolio that has the potential to perform in all market conditions, this may well prove to be a compelling option.
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