Though “text book safe haven” assets like government bonds look very expensive and offer little in the way of protection or yield, that doesn’t mean there aren’t valuable diversifiers elsewhere, Miton’s multi-asset head argued.
“We don’t believe diversification is dead,” he said. “Bonds are stretched but there are many different ways to diversify risk in multi-asset portfolios.”
He added: “One of the advantages of managing multi-asset funds is the range of levers we can employ, but that also means we can pick our battles.”
For instance, Rayner is foregoing “very low yielding” eurozone government and corporate bonds, as well as the interest rate sensitive long-dated government bonds, in favour of good quality short-dated US corporate bonds.
But he admits that the unpredictability of global growth, inflationary pressures and central bank actions presents challenges for multi-asset managers.
Still, “looking at the data in front of us now, our base case remains for growth to continue to be decent and central banks to raise rates opportunistically,” he said.
“In this scenario, good diversifiers to equity would likely be short-dated investment grade corporate bonds while, within equity, we have a number of unrelated themes to help to diversify risk.”
In particular, Rayner’s portfolios are playing off non-correlated themes like tech, healthcare, European banks and the Indian consumer.
As a security measure, he has stocked the portfolio with equities that will perform well in a stronger growth environment – financials and materials – and, conversely, those that will outshine in a low growth environment: technology disruptors.
“We also ensure that these broadly unrelated investment views are scaled appropriately, so that total portfolio risk is not dominated by any of them,” he continued. “This includes trimming the winners, so that risk doesn’t become too concentrated.”
Preparing for both scenarios is crucial for multi-asset managers, according to Rayner, because there is no telling when the bull run will finally come to an end.
“While this bull run and economic cycle are extended compared to history, there’s no point in fighting ghosts. Yes, valuations are high but history has shown them to be a poor indicator of the timing of market corrections.”
