Across the Liontrust Multi-Asset (MA) funds, strategic asset allocation (SAA) is the engine that dictates how we achieve our target risk levels and, therefore, ultimately determines a large part of our performance. The MA Funds are designed to meet client goals in terms of ensuring suitability, targeting risk and delivering long-term outcomes rather than trying to outperform peers or markets over shorter timeframes.
This means there will be short-term periods where performance looks different to peers and the ‘market’ because of allocations to certain asset classes as well as investment styles. We have seen this recently with the allocation to gilts and investment grade bonds in the MA Passive funds, which we will turn to later in this article.
Before that, we want to put the performance of our target risk funds in context. Performance is usually and understandably regarded as a relative game but we believe many investors are making unhelpful comparisons for target risk and risk profiled funds. Rather than review the performance of our target risk offerings against peers, we compare each one against the rest of the specific Liontrust risk range. This is to ensure each is achieving the following objectives over the short, medium and long term:
- Targeting the outcome expected by investors in terms of the level of risk, measured by volatility; this enables clients to match the appropriate portfolio to their desired risk profile.
- Maximising the return for each portfolio while targeting investors’ desired level of risk.
In building the SAA, the team is supported by EV, a third-party adviser, to construct a range of forward-looking target risk models with a 15-year time horizon. This is currently reviewed and rebalanced on a quarterly basis where appropriate. Whereas the MA Active and MA Blended fund ranges include tactical asset allocation decisions on top of this, the approach on the MA Passive funds is ‘passive-passive,’ in that asset class weightings follow long-term SAA and the team does not deviate from this via tactical tilts.
Over the long term, we are confident our SAA will continue to ensure suitability on the Funds and offer appropriate returns for a range of risk profiles. In the shorter term, however, there can be periods of fluctuation in performance and in momentum-driven markets, shifts in sentiment can mean asset prices become temporarily detached from long-term expected valuations.
For the lower and mid-risk MA Passive Funds, for example, our SAA drove a slightly higher allocation to government bonds last year and a correspondingly lower position in investment grade debt. The primary factor behind this move was that with interest rates low and spreads tight (the latter driven by improving economic conditions and continued yield-suppressing policies by central banks), the correlation of returns between investment grade and gilts had increased. On some metrics, this meant the former appeared more expensive and called into question whether potential returns from credit justified the extra risk. Gilts also tend to offer better downside protection during market corrections, which is important in supporting the funds.
This year, however, concerns about higher inflation, and potentially higher interest rates, have picked up on the back of increasingly positive predictions for economic recovery. Against this more confident backdrop, widespread selling of ‘safer’ assets meant a particularly poor first quarter for government bonds and the higher weighting in gilts has therefore been a drag on performance.
We want to stress this is a very short time period and while there are obvious concerns about the current spike in inflation, central banks warned this would happen and we are not expecting persistently higher prices over the long term. While yields have increased, bonds also look to have settled after recent selloffs, although we could see more volatility while markets focus on when central banks plan to taper asset purchases and potentially increase rates. In the meantime, as part of the latest quarterly SAA review, there was a general switch from government into corporate bonds across the MA funds.
A further performance point to consider is that our SAA has been tilted towards more cyclical and value equity markets such as the UK and Japan, with less in the growth-oriented US. This positioning was clearly more challenging last year with the US surging, particularly at the large-cap tech end of the market, but has been more positive since announcements on vaccines in November amid the subsequent global reflation trade.
SAA is a differentiator for the MA funds and will therefore produce differentiated performance; this will sometimes be above peers over the short term and sometimes below, and given the asset allocation, the funds have behaved exactly as expected. Longer term, we believe they will continue to fulfil their role – helping advisers and clients ensure suitability based on risk profile and delivering long-term goals.
