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John Husselbee
John Husselbee 24-01-22

Looking back or looking forward?

Past performance is not a guide to future performance. Do remember that the value of an investment and the income generated from them can fall as well as rise.

Given the range of approaches available in the multi-asset investment space, we have always said short-term peer group performance comparisons can be reductive and prefer to focus on long-term client outcomes.


Where we feel some comparing (and contrasting) is more appropriate, however, is when it comes to asset allocation and would encourage investors to be asking their multi-asset and discretionary fund managers how portfolios are positioned
– for the last decade or potentially for the next one?


Recent years have seen rising popularity and strong performance from passive, so-called lifestyle multi-asset offerings. In contrast, active management has had a challenging time with pressure to justify fees and a developing narrative that many funds are perennial underperformers. Over the last decade or so, however, we would point to a core reason behind both, with overall equity performance increasingly driven by a handful of US large-cap growth stocks – a few giant tech names are now effectively able to move the market by themselves.
The extraordinarily narrow nature of US market performance is reinforced by figures from S&P Dow Jones indices that show just five companies (Apple, Microsoft, Amazon, Facebook, and Alphabet) contributed a third of overall S&P 500 returns over five years to the end of August 2021.


Looking at this period, and going back as far as the global financial crisis in 2008, any funds with a meaningful position in these large US growth companies have outperformed. This includes those passive multi-asset offerings with market cap weighted exposure to the MSCI World Index; purely by nature of construction, with no active decisions, they have been the very definition of right place, right time.

Debate over whether tech superiority can continue will rumble on but we suggest a situation where 1% of companies are producing 33% of US market performance seems unsustainable. This is a potential challenge to those passive multi-asset funds with large exposure to expensive, momentum equities, and this ‘tech effect’ is surely worthy of analysis given how much a single factor has driven performance. It is in environments such as this when an active approach to asset allocation can be particularly beneficial, whether a portfolio is investing in active or passive funds – or a combination of both.

Compare and contrast – and how we do it

To explain this in more detail, the following is a compare and contrast between our mid-range target risk portfolio at Liontrust (Risk Grade 4) against a passive lifestyle offering with a traditional balanced asset allocation of 60% equities/40% bonds, where this is not actively managed. By examining the investment process behind these, we can see why each has performed as it has in recent years and, more importantly, why this can reverse as we look forward.

First, we need to go back to the motivating factor behind any fund of funds or multi-asset portfolio – to meet the goals, risk tolerance and time horizon of investors. There are many ways to achieve this but we see four key elements as standard: strategic asset allocation (SAA), tactical asset allocation (TAA), fund selection and stock selection. At Liontrust, our process includes all four; in contrast, the majority of passive offerings have SAA and (passive) stock section but remove the active decisions involved in TAA and fund selection.

As outlined, the make-up of the market and type of companies in the ascendancy over the last decade has meant that removing these active decisions has, for the most part, produced better performance – but there is nothing to suggest this will remain the case forever. 

If we focus on SAA, it initially appears that a good proportion of ‘balanced’ portfolios, including ours, have a similar asset allocation in that 60% equities/40% bond region, as the first set of charts above shows. When you dig deeper, however, as per the second set of charts, this split in passive offerings is typically done on a market cap weighted basis. This means if the MSCI All Country World Index has around 60% in the US, for example, around 40% of an entire portfolio (60% of that 60% in equities) will be invested in one market – and all in larger companies.

As a contrast to such market-cap weighted exposure, our equity allocation is far more diversified and also includes smaller companies, which a range of studies have shown are a vital component of long-term outperformance. For bonds, we also include exposure to high yield and emerging market debt as opposed to just conventional government and investment grade corporate debt. Broader exposure to asset classes – as well as including categories such as alternatives – not only gives additional sources of return but also more balanced and diversified portfolios. While a passive approach to SAA has been enough to secure outperformance over recent years given prevailing conditions, this does not diminish those other advantages over the longer term.

If SAA is the scientific part of our process, TAA and fund selection are the art. As an active multi-asset manager, we believe we can add value through both but whenever any kind of decision is involved, there is potential to be right or wrong. Our call to be underweight expensive US equities, for example, has negatively impacted performance in recent years relative to market cap weighted passive portfolios heavily invested in surging large-cap tech companies.

Finally, stock selection is the end point for all fund of funds and multi-asset portfolios. As we have shown for the passive 60/40 funds, the make-up of the MSCI All Country World Index means close to 40% is automatically invested in US large-cap equities at present, however expensive they may be. To give an indication of the nature of the MSCI Index, at the end of December 2021, the largest six stocks were Apple, Microsoft, Amazon, Tesla, Alphabet and Facebook – a list most would struggle to argue constitutes diversified ‘global’ equity exposure.

With active portfolios, underlying managers select stocks based on their particular investment style and some are happy to own these more expensive growth names. The difference is that this is the result of an active decision about the companies’ prospects rather than just because they are the largest stocks in an index.

Our portfolios continue to be well diversified, with a tilt towards cheaper parts of the market and a blend of managers with a record of long-term outperformance. As the stock market becomes increasingly narrow in its leadership, we feel the best option for a multi-asset portfolio is to be even more diversified, with flexibility required to invest in important areas such as small-cap equities or non-core bonds.

To finish, we come back to the initial question that investors should be asking their multi-asset managers: are my portfolios positioned for the past or the future? The massive dominance of US technology has driven two further equity trends over recent years: large-cap companies outperforming small and growth massively outstripping value, but the priced to perfection nature of these stocks has to give investors pause.

Across our Liontrust Multi-Asset funds and portfolios, we continue to be bullish on the reflation trade for 2022 and are positioning for three long-term views: that global ex-US equities are more attractive than the expensive US, small caps should outperform large, and value should outstrip growth, all of which run contrary to what happened for most of the 2010s. These are active decisions and there may be bumps along the way but we would rather be preparing for the future, and accessing opportunities at attractive valuations, than rooted in an expensive past.

Understand common financial words and terms See our glossary
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.
 
Disclaimer
 
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 35 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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