Why rising markets are making Schroders' Simon Doyle uneasy
When Simon Doyle of Schroders Australia takes a broad view of the recent performance of capital markets and thinks about the undercurrents of shifting geopolitical, monetary, and fiscal policies, he’s rightfully worried.
Central banks and governments have pumped unprecedented amounts of liquidity to support their economies, propping up nearly every asset class in the process and setting the scene for higher inflation. Meanwhile, the outcry over societal issues exposed by the pandemic, such as inequality, is already triggering a reset of policy settings leading to higher taxes for big corporations and the rich.
With asset prices and valuations where they are, and those thematics only just starting to play out, Doyle is taking a prudent approach to managing the $1.4 billion multi-asset Schroder Real Return Fund - WC.
“When you’ve got fully priced markets, it's all great until something goes wrong. I think the risks are starting to skew a bit to the downside.”
On Livewire’s 100 Top-Rated Fund Series, one of Australia's most experienced investors fleshes out his reasons for being concerned and the steps he’s taking to protect his portfolio from a potential market calamity.
James Marlay: Hello and welcome to Livewire's 100 Top-Rated Fund series. I'm your host, James Marlay and I'm here with Simon Doyle, who is the Head of Fixed Income and Multi-Asset at Schroders. Simon, glad to have you here. I know a lot of people love following your multi-asset strategy. What's the thing that motivates you?
Simon Doyle: I've been around for a while, but I guess there's an element of experience in that. But one thing that's important to me is integrity and making sure that each day, I'm doing the right thing and trying to do what we say we're going to do for our clients. And I think if we can do that, we won't always make everyone happy every day but I think over time, that will end up adding up to some pretty good results. I think that integrity is very important to me.
Investing through crisis after crisis
James Marlay: I was hoping you could maybe think back over your career and maybe pinpoint one or two events or people that have really helped to shape the way you think about investing?
Simon Doyle: In terms of people, I'd probably go back to high school and I was lucky, in a way, to be going through year 11 and 12 economics in 1983-1984, which was a time of huge deregulation in the Australian economy. We had a very inspiring teacher and we spent a lot of time thinking about floating of the dollar and deregulation and all those sorts of things. That gave me a real desire to work in financial markets.
I didn't really know that much about funds management at the time but it set me on this path. Then in terms of my career, it's really been about, I started work four weeks after the 1987 crash. I was given the job of forecasting bond yields about eight or nine months before the bond market crashed. I remember going around the country trying to promote a technology fund for AMP in early 2000 and we launched our Real Return strategy in October 2008. I guess that those experiences of market crises have been very important in terms of shaping the sort of investor that I am.
James Marlay: Do you feel like you're better at handling the crises now?
Simon Doyle: I guess one of the challenges today is central banks don't allow crises to really develop and go on for too long and I think you don't really understand risk, you don't really understand investor behaviour until you're in the middle of a crisis and you're trying to manage money in the middle of a crisis.
I often say to my team that, experience is just that, it's experience and in financial markets the bits you remember, they're really bad, they're really tough days. When markets are just running on normally, you tend to forget those. I think it is really important in terms of developing your understanding of your philosophy of risk and how your clients behave and what they actually expect from you.
Taking stock of the policy environment
James Marlay: Take me inside the room. What are you and your team focused on at the moment? What are you spending the most time debating?
Simon Doyle: There's a couple of things. I think one is the policy environment. We're in this world where, in a way markets are happy; economies, in some ways, are happy because central banks and governments have thrown the kitchen sink at them and that's helped support economies, which is good.
It's also pushed asset prices up and I think most asset prices have all moved in the right direction. That high degree of correlation in market performance, that relatively elevated valuation across every asset you look at, including things like house prices in Sydney, for example, is a challenge in terms of thinking about how are we going to make money going forward.
I think the other sort of side of that is, well, what causes this to break? I guess one of the things most people are thinking about at the moment is inflation. With this sort of massive injection of liquidity into economies, into financial markets, you're starting to see problems in supply chains and so on and if we get inflation, then this very positive environment we've enjoyed in asset pricing could come unstuck and I think that's taking a lot of our focus at the moment.
Bonds could be 'the cause of the problem'
James Marlay: How is that flowing through to where the rubber hits the road in terms of what you're putting into your portfolios as in how you're shaping them?
Simon Doyle: It comes down to what do we do about that? We can talk about it and we can analyse it, but we've got to do something. I guess this comes back to underlying beliefs and one is, we do think valuations are important. They're not always important every day, but they do shape returns in the medium to long run.
They tell us a lot about risk and that's telling us we probably do need to be a bit cautious. It's also making us think about how do we hedge that risk in portfolios? The fact that bond yields are very low, interest rates are very low, just complicates things because bonds as a diversifier are likely to be less effective and could actually be the cause of the problem.
We're looking at strategies we can employ to manage that risk and part of that is not taking too much risk in the first place so we don't have to worry about hedging it. But another element of that is thinking about and looking at things like currency, looking at options, looking at diversifying strategies that can help us manage that overall risk. We want to still participate, but we don't want to be too exposed if something goes wrong,
Finding value in niche areas
James Marlay: You run multi-asset portfolios. I'll put a question to you that I've been asking some of the researchers today. Is there an asset class that you think is underappreciated or underrepresented in portfolios that you think has a really important role to serve going forward from this point?
Simon Doyle: We're looking broader and deeper in markets, so pulling apart the broader indices and, for example, looking within the global bond universe to say, well, which parts of that are actually better value? Let's not just own the entirety, let's really carve out the pieces that we think have value, some of the more interesting things in that for us are things like Asian credit, for example.
Other areas which I think are of interest are private markets. I think the easy money has flowed into public markets, but there are some pockets of private markets where there's a risk premium, so investors can use their liquidity budget, if you like, to capture some of that additional risk premium. I think institutional investor portfolios are probably relatively well exposed to some of those things, particularly on the private side, but individual retail investors, I think, have still got some scope to move when it comes to private markets.
Where the Schroder Real Return Fund is currently invested
Source: Schroders Australia (as of May 2021)
A 'very unusual' cycle
James Marlay: If you were to use a simple framework for thinking about market cycles moving from scepticism or pessimism, where we were 12 months ago through to scepticism, optimism, and euphoria, where would you peg us as being right now?
Simon Doyle: It's not a normal cycle. I think if you look at the market cycle in terms of what's priced into asset markets, you’d say you're pretty late cycle. You're kind of somewhere close to your maybe not euphoria, but you're sort of heading up on that end of the spectrum. If you look at the economic cycle, you're probably further back. And I think that the fact that the economic cycle has still got more to run is something that's kind of supporting the market cycle. It's hard to kind of say we're exactly here because it is a very unusual cycle.
Geopolitical shifts and inequality will shape policy
James Marlay: Is there a long-term trend or a theme that is playing out through the markets that you think represents an interesting opportunity for investors at the moment?
Simon Doyle: One of the things which I think is now starting to become important is this broader idea of rebalancing. We're seeing it in terms of geopolitics; US, China, and how and where that plays out. We're moving into a world of de-globalisation which could be problematic for inflation and a kind of a realignment of the geopolitical power alignment.
I think the inequality story is playing out as well. And that's, I think, likely to flow through into policy settings and so on in terms of taxation and so forth. So I think there's this very positive short-term story, but I think there's a number of fairly powerful, longer-term structural thematics that I think will have a big impact over the next decade.
James Marlay: Are there any specific ways that you are catering for that from an investment perspective or that you're factoring into the portfolios?
Simon Doyle: I think one thing is we shouldn't underestimate risk. When you've got fully priced markets, it's all great until something goes wrong. I think the risks are starting to skew a bit to the downside. Another is, in an environment where central banks have really almost backed themselves into a corner around how they can operate monetary policy, then, currency markets, I think, could be an interesting space where some of the pressure of these factors will play out.
An effective hedge for portfolios
James Marlay: You alluded earlier about the challenge that bonds may present in the defensive part of portfolios. Have you found an effective way to mitigate some of that or an alternative? How have you thought about that challenge?
Simon Doyle: I think one of the key conundrums for investors, and I think there's a couple of ways to think about it. One is, I think of hedges. If you can't hedge something, then hold less of the thing that you're trying to hedge. So if bonds are less effective at hedging equity risk then hold less equities if you're concerned about valuation. I think that's the most powerful strategy you've got.
If you look at currency markets, I still think the US dollar, the US dollar goes up when equity markets go down. That's a pretty reliable relationship, so not necessarily thinking of currency as a return driver, but as a risk hedge and I think you're seeing a bit more in terms of outright protection coming through things like the option market. I think substituting some of that equity risk for maybe high yielding debt-type investments, which aren't as risky as equities, but offer you a bit more carry than sort of traditional fixed income assets.
I think it's a bit of a multi-pronged approach, but at the core is managing your overall level of risk in the portfolio, then you don't have to worry as much about hedging it.
Doyle's top tip: Do your own thing
James Marlay: Final question for you. From all your experience as an investor, if there was a single piece of advice that you could offer to people to help them be more successful, what would that be?
Simon Doyle: One thing I've learned is if your objective is to do a certain thing, focus on doing that. If you're looking to achieve a particular rate of return, build a portfolio that does it. Don't worry about what everyone else is doing. Don't worry about missing out on something that was better. If you're achieving, through the strategy you implement, what you've actually set out to achieve to meet your goals, then I think that will deliver you the best results over the long run.
James Marlay: Simon, thanks very much for coming in today, and thanks for being part of the 100 Top Rated Funds series.
Simon Doyle: It's a pleasure. Thanks for having me.
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