Markets have endured an extraordinarily volatile period over the last two years and at times we have held over 20 per cent in non-directional investments, that is, cash, government bonds and gold. Our agile asset allocation decisions have helped to dampen volatility during some difficult periods, for example, the first quarter of this year.
We currently hold 10 per cent in cash, reflecting our recognition that markets have travelled a long way – arguably too far and too quickly – from the March lows.
Government rescue packages together with easing fiscal and monetary policy have stabilised economies, leading to sharp market rallies. However, at some stage it will dawn on investors that the path of future growth will be shallower than many are used to and most hope for.
The toxic assets have not been effectively dealt with, nor have the governments of the US or the UK fully thought about how they are going to get themselves back to some form of balance. For instance, debt to gross domestic product ratio in the US is over 350 per cent and this could take some years to come down to more acceptable levels.
That said, we firmly believe that there are managers out there with the experience to provide strong returns despite the likely headwinds. Our favoured managers tend to be boutique-based, fundamentally driven bottom-up stockpickers who adhere to being unconstrained by their benchmarks while adopting a more total return philosophy. It is worth pointing out that this bias does not exclude the bigger investment houses. Rather it is the flexibility of a fund’s mandate and the underlying investment process that are more pertinent.
While we have alluded to the importance of asset allocation, we still expect over two-thirds of our outperformance to come from superior fund selection, with the balance from asset allocation.
Graham Duce is co-head of multi-manager products at Aberdeen Asset Managers