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Tactical Asset Allocation update: Q2 2021

Past performance does not predict future returns. You may get back less than you originally invested. Reference to specific securities is not intended as a recommendation to purchase or sell any investment.

Tactical Asset Allocation (TAA) is one of the five stages of the Multi-Asset investment process – the others being Strategic Asset Allocation (SAA), fund selection, portfolio construction and monitoring.

The Multi-Asset investment team has a medium term view – 12 to 18 months – of the prospects for each asset class and this forms the TAA. Each asset class is assigned a rating from one to five, with one being the most bearish and five the most bullish. TAA is the target (not the actual position) for every asset class and the investment team builds towards this within the Multi-Asset funds and portfolios over time. Having a 12 to 18-month view means the team will increase their positions when the valuations of the asset classes are attractive. The team’s core approach is to buy low and they will not overpay for assets, however highly they score.

The team reviews the TAA every quarter but it is important to stress this does not reflect a quarterly view. The TAA rating is only altered up or down when there is a fundamental change in the assessment of a particular asset class, and by taking a longer term view, the team is seeking to ignore short-term market noise and avoid trying to time the market. The table below shows the current TAA and includes all asset classes regardless of whether they are included across the range of funds and portfolios. The direction of travel shows the last change in the TAA, whenever this occurred.

Changes in this latest version include a slight increase in target TAA for gilts and Global government bonds as yields have risen from extreme lows over recent months, although both remain towards the more bearish end of the scale. We also shifted to neutral on US equities, with the market starting to offer better value after a recent cooling off – despite our long-term concerns on tech valuations remaining intact – and are slightly less bullish on Japan to reflect concerns about how the lagging vaccination effort could impact domestic recovery.

Asset class

Q2 2021 Score

Direction of travel




Overall, we continue to adopt a risk-on stance but acknowledge there are challenges to this view, from growth disappointments to virus mutations, with the terrible humanitarian news from India providing a salutary reminder of the risks posed, especially in less-vaccinated economies. There remain plenty of positive impetuses, such as monetary support, vaccine distribution and pent-up corporate and consumer demand. The cycle remains a positive one for growth-orientated assets. While central banks such as the US Federal Reserve have started murmuring about tapering, there remains no serious prospect of tightening policy in the medium term.



Cash offers little to no prospect of a real return in the coming years, with major central banks remaining committed to ultra-loose monetary policy. Cash does have the benefit of offering a store of value at times of market stress, so a modest allocation may be appropriate in portfolios depending on the mandate.

UK gilts


Yields have risen off their extreme lows in recent months but remain underwhelming overall, with the bias of risk continuing to be to the upside (or to the downside in price terms) especially if the spectre of inflation finally raises its head in 2021. Gilts still provide a useful function as portfolio insurance in times of market duress but offer little more than a cushion to equities.

Global government bonds


A global basket of currencies and interest rate risks can result in a differentiated returns stream from UK gilts. Yields remain close to all-time lows and the bias of risk looks to be to the upside (or the downside in price terms), especially if the spectre of inflation finally raises its head in 2021. These bonds still provide a useful function as portfolio insurance in times of market duress but offer little more than a cushion to equities.

Investment grade (IG) corporate bonds


The paucity of spread over government bonds means investment grade is tainted by overall low benchmark yields. The modest yield pick-up means IG looks reasonable from a relative value perspective versus sovereigns but is not an attractive proposition in its own right. In times of market stress, however, this debt should benefit from its inherent duration.

Index-linked bonds


This debt would benefit versus nominal government bonds if inflation proves to be ahead of expectations, although the possibility of higher prices is now more widely anticipated than it was last year. Index-linked bonds tend to have longer duration than the same tenor nominals so duration positioning needs to be considered. Big moves out in yields will also impact these bonds. It is best to buy inflation protection when the risk is underappreciated, which is not the case today.

High yield (HY)


While spreads are still relatively tight by historical standards, the returns available from high yield are reasonably attractive and an overall risk-on environment should be supportive of prices. Investors should expect to receive at least coupon yield and potentially grinding higher capital appreciation as spreads drift in. HY will experience weakness if spreads widen but the asset class is currently continuing to benefit from the tailwind of monetary and fiscal support.

Emerging market debt (EMD)


Spreads look reasonable but the idiosyncrasies of the emerging market environment are potentially better rewarded in EM equities. Furthermore, US dollar- denominated debt will be subject to moves in the US yield curve. There is some potential for support from a softer US dollar, better liquidity than expected, and carry hunters.



The composition/concentration of global indices is a negative, as are valuations. But a positive overall market backdrop supports convertibles, which provide an attractive risk/return profile thanks to their optionality and the bond floor.

Equities overall


The risk-on environment continues to favour equities. Markets have come a long way from the 2020 lows but this is largely justified by government spending and decent corporate results. No sign of tightening policy in the medium term, combined with pent-up demand from lockdowns and reasonable valuations outside of US mega caps, give reasons to be optimistic. Risks to the downside would come from growth disappointments, virus mutations that reduce vaccine efficacy, or vaccine rollout bottlenecks.

US equity


The US is a formidable market with a strong entrepreneurial culture and a roster of world-class companies. While monetary and fiscal stimulus is likely to continue, valuations look elevated for the index overall, although the picture is better outside of mega-cap growth. Indeed, 2021 US earnings have surprised on the upside and the market is starting to offer better value after a recent cooling off. A shift back towards ‘real world’ rather than virtual interaction will put pressure on technology revenues and, overall, share prices have already discounted better-than-expected earnings.

US small caps


Despite our overall caution on the US, we see smaller companies as ripe for a rebound in light of their significant underperformance versus large caps. As the recovery broadens, investors will be looking elsewhere and consumers flush with cash should benefit domestically orientated companies, especially small caps. As the economy reopens (we are bullish about the cycle), small caps should outperform large. A risk to this would come from tax hikes, which tend to hit small and mid-cap companies more than their larger counterparts.

UK equity


The UK was hit from all sides in 2020 with Covid impact, sector composition (heavy in struggling resources, financials and energy), and Brexit combining to make it the most unloved major market. Despite its global revenue base, there is too much pessimism in the price so, tactically, this is an attractive market. A strong pound is likely to be a headwind, however.

UK small caps


A strong rebound in UK smaller companies is already under way but there is further scope for mean reversion with Brexit uncertainty disappearing, sterling normalisation and further merger and acquisition (M&A) activity. Enhanced economic activity thanks to vaccine rollout should also provide impetus to domestic-orientated names.

European equity


Europe is coming under scrutiny in the short term as it continues to struggle with vaccine rollout but the region remains a big beneficiary of a global recovery and normalisation. Export-led European stocks will be geared into a global recovery and consumer brands should benefit from high levels of spending power that can turn on post lockdown. Overall, valuations look attractive and Europe is much further along the ESG path on a company by company basis than other markets.

European small Caps


European small caps are under similar pressures to their larger counterparts but should be well positioned to take advantage of global reopening and increased domestic consumption on the continent. Prospects would come under pressure should governments accelerate their plans to balance the books.

Japanese equity


Japanese equities, with a large proportion of export-driven businesses, are well placed to benefit from the global economic rebound. Questions nag in the short term over the ability of the economy to recover its stride as vaccine rollout lags other developed markets. The Japanese market remains lowly valued compared to other developed markets. Exporting stocks tend to benefit from yen weakness so local currency strength could provide a headwind to returns.

Japanese small Caps


Japanese small caps are under similar pressures to their large counterparts but should be well positioned to take advantage of global reopening and increased domestic consumption.

Emerging markets equity


Emerging markets will benefit from the global reflation trade. Loose monetary policies and a weak US dollar also provide a supportive environment. The long-term fundamentals remain intact but shorter-term pandemic shocks and tightening in China will continue to hit sentiment. Overall, EMs should benefit from robust commodity prices. EMs equity remain highly geared into sentiment shifts – both positive and negative – and are also highly sensitive to domestic and international politics.

Asian equity


As with EMs, Asia will benefit from the reflation trade and loose monetary policies and a weak US dollar provides a supportive environment. These economies have, on the whole, fared well through the Covid crisis and domestic activity remains strong. They should also benefit from robust commodity prices. Risks remain from the perspective of global sentiment as well as regional political tensions.



Property offers a reasonable yield pick-up compared to many other asset classes and price moves in 2020 imply that a lot of bad news is already factored in. Capital values are starting to rebound but rental growth is decelerating. There is also uncertainty surrounding a number of property types in a post-Covid world: the anticipated demise of the office and high street retail sectors could well be overstated but current pressures on tenants will have long-term repercussions.



Commodities have rebounded strongly off their lows and are not as attractive a value play today. Over the medium to long term, they should remain correlated to continued positive news on global economic activity. Broad allocations to commodities should also provide some protection if inflation surprises on the upside. Conversely, downward price pressure could resume if growth disappoints following the initial post-Covid recovery.

Hedge funds


Given time, the right hedge fund strategy can provide a diversified return stream compared to more traditional asset classes. These funds are unlikely to keep up with a raging bull market but should post reasonable returns in a constructive environment for risk assets.

Absolute return


Well-chosen absolute return vehicles can be a useful diversifier to overall portfolio risk thanks to their low correlation with traditional asset classes. But they are unlikely to keep up with ultimate safe havens such as government bonds in times of market duress.


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Key Risks 
Past performance is not a guide to future performance. The value of an investment and the income generated from it can fall as well as rise and is not guaranteed. You may get back less than you originally invested. The issue of units/shares in Liontrust Funds may be subject to an initial charge, which will have an impact on the realisable value of the investment, particularly in the short term. Investments should always be considered as long term.
Some of the Funds and Model Portfolios managed by the Multi-Asset Team have exposure to foreign currencies and may be subject to fluctuations in value due to movements in exchange rates. The majority of the Funds and Model Portfolios invest in Fixed Income securities indirectly through collective investment schemes. The value of fixed income securities will fall if the issuer is unable to repay its debt or has its credit rating reduced. Generally, the higher the perceived credit risk of the issuer, the higher the rate of interest. Bond markets may be subject to reduced liquidity. Some Funds may have exposure to property via collective investment schemes. Property funds may be more difficult to value objectively so may be incorrectly priced, and may at times be harder to sell. This could lead to reduced liquidity in the Fund. Some Funds and Model Portfolios also invest in non-mainstream (alternative) assets indirectly through collective investment schemes. During periods of stressed market conditions non-mainstream (alternative) assets may be difficult to sell at a fair price, which may cause prices to fluctuate more sharply.
This is a marketing communication. Before making an investment, you should read the relevant Prospectus and the Key Investor Information Document (KIID), which provide full product details including investment charges and risks. These documents can be obtained, free of charge, from www.liontrust.co.uk or direct from Liontrust. Always research your own investments. If you are not a professional investor please consult a regulated financial adviser regarding the suitability of such an investment for you and your personal circumstances. 
This should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Examples of stocks are provided for general information only to demonstrate our investment philosophy. The investment being promoted is for units in a fund, not directly in the underlying assets. It contains information and analysis that is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content of this document, no representation or warranty, express or implied, is made by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified. It should not be copied, forwarded, reproduced, divulged or otherwise distributed in any form whether by way of fax, email, oral or otherwise, in whole or in part without the express and prior written consent of Liontrust. Always research your own investments and if you are not a professional investor please consult a regulated financial adviser regarding the suitability of such an investment for you and your personal circumstances. 
John Husselbee
John Husselbee
John Husselbee has 38 years’ experience managing multi-asset, multi-manager funds and portfolios. Before joining Liontrust in 2013, John was co-founder and CIO of North Investment Partners and Director of Multi-Manager Investments at Henderson Global Investors.

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