Q: Which asset classes, sectors or strategies are attracting your attention and why?
From an asset allocation perspective, we still prefer equity risk to bond risk. However, we see evidence of the US labour market beginning to slow under the pressure of interest rates at 5.5%. Though it does not seem like we are about to enter an imminent recession, the probability has certainly risen compared with six months ago. That leaves us with a maintained pro-equity stance but more watchful than previously. Within bonds, this translates into a preference for investment-grade corporate bonds rather than government bonds.
Most of our security selection risk comes from our equity portfolio of 40-50 high-conviction positions. Having benefited from the exceptionally concentrated markets over the past 18 months, our attention has now turned to where the market will go next. We still believe there is value in some of the mega-cap tech companies but we are also seeing exciting opportunities in other areas so have become more balanced in our risk-taking.
Many of the most attractive equities in the market today are those that have suffered as a result of the high interest rate environment, such as the US home improvement companies. Likewise, credit agencies have suffered from declining issuance levels over the past 18 months but should receive a boost to revenues as corporates take advantage of lower interest rates to refinance.
Finally, one of the overarching themes of the next decade will be rising geopolitical tensions across the globe. As multi-asset investors we can access this trend through gold, which provides not only a store of value but benefits from emerging market central banks buying significant amounts of the metal to diversify away from the US dollar.
Q: How do you see sustainable and ESG-oriented investing evolving from here?
Multi-asset, ESG-oriented investing adds an extra layer of complexity compared with single-asset funds, given the variety of securities. Equity ESG is well-established and many companies will have a dedicated ESG strategy that details the exposures you are interested in, such as scope 1-3 emissions.
Fixed income ESG is developing fast. As with equities, corporate disclosure is improving, meaning there is more scope to invest on an ESG-aligned basis. Government issuance of green bonds has also been helpful, although issues remain on the ringfencing of proceeds for environmental projects.
Alternatives are more difficult to analyse and subject to ‘greenwashing’ given the opacity of the structures and lack of proper disclosure. In these cases, it is important to spend time on due diligence and only align yourself with managers who are prepared to disclose the required information.
Finally, SDR/SFDR labelling will be helpful from a commercial sense. By calling out greenwashing and other mislabelling practices, those funds that are genuinely ESG-focused should benefit.
Read the rest of this article in the September issue of Portfolio Adviser magazine
