A rising tide lifts all boats, and the ten-year bull market has made it more important to be in the boat than to be sailing it well. Simon Doyle at Schroders cautions that while Asset Allocation hasn’t mattered in recent years… it will be critical now that the tide is turning.

He offers a clear warning here that investors need to change their approach: "As things change, asset allocation will matter a lot more, because it will be what assets you own, and not how you get that exposure, that actually drives returns.” He discusses this in this video with transcript, providing investors 3 things to think about if they want to generate wealth over the next two to three years.

Edited transcript

The last few years, asset allocation in reality hasn't mattered that much, because markets have generally gone up. So, what you owned probably didn't matter that much. What mattered was that you were invested. But as things change, asset allocation will matter a lot more, because it will be what assets you own, not how you get that exposure that actually drives returns.

You were talking there about US equities having performed very well last year and being one of the only markets to actually deliver positive returns. That won't be the case forever.

That will turn, and that will turn a whole raft of markets on the back of it. And so, I think making sure asset allocation, what assets are owned, is appropriate for that changing environment, I think that will be one of the key drivers of performance for investors.

I think there are a couple of other things over the last few years that will be quite different going forward.

The rise of passive strategies in growth oriented momentum markets; passive strategies have done quite well. But as things get more difficult, active managers that can kind of shift portfolios away from simply momentum, towards true value, will start to be rewarded. So, I think alongside asset allocation, active management at a sector level will come back and come back strongly.

And I think one of the other things that's occurred in markets too over the last few years, which will be important, is, and it's related to those two points, is that we've seen very strong performance from growth over value as a style factor. And that's been reflected in the US market in particular, in a lot of the tech stocks. And it's been reflected I think in Australia in some small caps, whereas some of the large caps that have been the focus of a lot of attention for a whole range of factors. And while over the very long run value as a style tends to outperform growth, in the last 10 years, growth has outperformed value by about 50%. I don't think that'll be sustained.

So, I think 3 very important things for investors to think about to generate wealth over the next two to three years will include:

• Making sure asset allocation is flexible and has the portfolio owning the right assets, including not owning the things that are likely to blow up.
• Thinking more about active: it may cost more, but it's likely to be rewarded significantly in terms of Alpha as the environment changes.
• Thinking about style biases in portfolios

Further insights

If asset allocation is what ultimately drives returns and manages risk, then we need an approach to asset allocation that is forward looking and relevant over the timeframe that we’re investing. Find out more here