"Multi-asset strategies can now potentially produce higher returns with a more diversified, less risky portfolio. While the 60:40 portfolio could have been questioned while bond yields were close to zero, the outlook for this strategy looks much better with mid-single digit yields on offer."
Interestingly, Chris Ellis Thomas, portfolio manager on BlackRock's MyMap fund range, says equity markets tend to rally as interest rates are cut, with the impact being most acute in high growth markets such as the US.
However, he adds that the economic growth environment is arguably more important than the pathway of rates in determining the medium-term performance of equities.
He adds: “If falling inflation is a harbinger of slower growth, equity markets are likely to struggle. The impact on fixed income markets is clearer, government debt, in particular shorter dated bonds, typically respond positively to falling interest rates. Additionally, bond and equity correlations tend to be lower in lower inflation environments.
“All things considered, we would expect a normalisation in interest rates and a reduction in inflation to benefit multi-asset portfolios.”
He highlights the MyMap portfolios, which combine broad diversification and active asset allocation, which allows advisers to outsource the risk management of their portfolios, and provides peace of mind to end clients by delivering a consistent level of volatility across market environments.
There are many ways that allocation has been impacted.
Lumin Wealth investment manager Elliott Frost says since the start of 2022, managers in aggregate have reduced their exposure to equities in favour of bonds, which looked more attractive after the sell-off following Liz Truss’ disastrous "mini"-Budget.
Frost says more rate cuts going forward will be positive for interest rate sensitive assets, and a higher starting point for fixed income provides the opportunity for some capital appreciation.
However, he warns higher rates could be on the cards due to the nature of the recovery, continued service sector inflation, and wider global issues such as supply chain disruption as well as various political impacts.
He adds: “Our risk management process combines qualitative and quantitative aspects, based on the fact we believe ‘investing is an art just as much as it is a science’.
"We believe in making portfolios diversified across asset class, geography and sector, limiting drawdowns from single events such as the global financial crisis, Ukraine etc. Portfolio returns are driven by a range of factors, for example value, small-cap, growth, momentum, and others.
