When ‘defensive’ isn’t defensive enough

With challenges for equity markets rising, even a defensively positioned balance fund, with just 45-50% equity exposure could struggle to deliver positive returns, warns Simon Doyle, Head of Fixed Income & Multi-Asset at Schroders Australia, who emphasises that true flexibility in asset allocation will be critical ahead.  

In this exclusive, Simon clearly flags the risks markets face right now: “as these dynamics change, as volatility inevitably starts to pick up, as the policy challenges start to become greater for policy makers and for investors, markets are going to start to move. Probably not up… probably down”. Access this short video and transcript for his full view, and to hear why his equity exposure is currently in the low 20% range. 

Edited transcript: 

“Over the last few years, portfolios that have been dominated by equity exposure have actually done pretty well. So traditional balance type structures that have had fairly fixed asset allocations have actually done quite well. But just because they've done quite well in a particular environment, it doesn't mean that will continue going forward. 

So I think as these dynamics change, as volatility inevitably starts to pick up, as the policy challenges start to become greater, both for policy makers and for investors, markets are going to start to move. Probably not up… probably down. 

So strategies that allow investors to move away from those assets that are most vulnerable have greater breadth in terms of the sorts of investments that they came make. Whether that be in currencies, whether that can be profiting from changes in relative prices that might occur in these environments, I think are going to be quite beneficial. 

When we think about objective-based type portfolios, which have that flexible asset allocation element very much embedded within them, the key idea is really to give us the flexibility to make the investment decisions that align the portfolio most closely with the objectives of the investor. 

Those objectives are consistent real rates of return or consistent returns above cash, low levels of volatility, but particularly to preserve capital and protect the investor in environments where markets aren't doing all that free and heavy lifting. 

So I think it's important to have true flexibility in the sorts of positions that you can have in portfolios, to enable those objectives to be met in all environments. Not just environments where equity markets are rising. 

To give you an example, our objective based portfolios at the moment have equity exposure in the low 20% range. That's about as low as it's been in the last 10 years. 

Compare that to a balanced fund, which even a defensively positioned balance fund would still have equity exposure somewhere in the order of probably 45 to 50% in equity. So if equity markets fall sharply, those strategies will all struggle to deliver positive returns to investors.

You can find further insights from the Multi-Asset team at Schroders here