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Multi-manager’s view: Equities’ value must be balanced with volatility

Despite last year being a generally positive year for equities, particularly emerging market and Asia equities which saw strong gains due to positive sentiment around China, the wider environment has remained volatile and uncertain, as evidenced by the changing fortunes of key asset classes.

This year’s Barings research once again illustrates this year-on-year volatility, with the best and worst performing assets changing dramatically.

In our opinion, the study shows why multi-asset funds, which have an unrestricted mandate to move into and out of asset classes as the fund manager sees fit, have found strong favour with investors looking for efficient investment vehicles.

The research shows that the best performing asset class in 2012 was European equities, with returns of 17.8 per cent. Emerging market equities was the third best asset class, returning 13.4 per cent over the year.

In 2011, however, emerging market equities and European equities were the two worst performing asset returning negative 17.6 per cent and negative 15.2 per cent respectively.

The best performing asset class in 2011 was index linked gilts, with gold bullion in third place with returns of 23.3 per cent and 11.9 per cent respectively. But by 2012 both were in the bottom four.

This volatility is also in evidence over the longer-term. Emerging market equities was the best-performing asset class in 2007, the worst performer in 2008 and back in the top spot in 2009. It remained in the top four in 2010 before dropping into last place in 2011.

We increased our allocation to emerging market towards the end of 2012 and this helped drive performance. We invested in UK firms with emerging market exposure as well as more directly into emerging market equities.

For emerging markets in 2013, the recent aversion to the perceived riskier parts of the equity universe means that valuations are particularly attractive. Asian markets finished the year strongly – helped by an improving economic picture in China – and Barings expects emerging equities to perform better in 2013.

In terms of the wider picture for the year ahead, the economic and policymaking backdrop looks to be improving at the margin. This has significant implications for risk assets.

Although the pace of economic growth is likely to be modest and unevenly distributed, it should be positive for profit margins. Equity valuations look cheap-ish versus government bonds.

In our view, equities will remain a volatile asset class because political risks are still very obvious, but these factors are compensated for in the higher risk premia available.

Percival Stanion is head of the multi asset team at Barings

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