We invest for purpose
Markets are constantly moving – and when conditions change investors must rethink their asset allocation.
Our flexible and dynamic approach draws on a global opportunity set to meet the multiple, often competing objectives of our clients. The goal is to tie all investment decisions to the ultimate objective of the portfolio.
Time has shown that asset allocation decisions are the dominant driver of overall portfolio returns and multi-asset investing provides risk and return benefits that are not typically achievable by investing in a single asset class.
Our asset allocation moves with markets
The foundation of our portfolios, our neutral asset allocation, takes a long term view on economies, markets and expected returns across asset classes. While neutral asset allocation alone will be the dominant driver of returns, there is also opportunity to mitigate portfolio risks and generate additional returns as market conditions change. We supplement our long term neutral asset allocation with dynamic asset allocation, which exploits shorter-term market inefficiencies.
How our portfolio works
Neutral asset allocation
The ‘neutral’ asset allocation is the mix of investments that we believe has the highest likelihood of achieving a given portfolio’s long-term objectives based on fundamentals. The first step in our investment process is determining the economic outlook, both globally and for individual countries.
Using current valuations as a starting point, key economic variables including GDP growth, inflation, risk free rates, and long-term bond yields enable us to calculate expected returns for various asset classes.
Dynamic asset allocation
Dynamic asset allocation or ‘daa’ is the process of shifting the ‘neutral’ position of a portfolio by taking into account shorter-term market conditions. DAA positioning can deliver additional returns and help mitigate portfolio risks through protection strategies (such as the use of derivatives), thereby maximising the probability of meeting portfolio objectives.
As long-term investors, and fundamental to our investment philosophy, we believe that markets are not completely and globally efficient - local considerations such as liquidity requirements, regulatory constraints, mandatory hedging and even simple home biases allow dislocations to exist.
Asset allocation when the future ain't what it used to be
Over the past 40 years, strategic asset allocation has successfully relied on diversification alone to deliver strong long-term returns. With the diversification benefits historically delivered by equities and bonds weakening in today’s markets, and expected returns across all asset classes falling lower, portfolios need to adapt to deliver on their objectives.
Do not expect the same dynamics going forward
Equities valuations have only been higher twice before in the last 100 years, in 2000 and 1929. Based on these valuations, history indicates that expected returns over the next 5 to 10 years will be much lower.
Source: Robert Shiller, Yale University, data to 30 June 2020. Price-Earnings Ratio (lhs) is the US equity valuations are based on the cyclically adjust price earnings ratio, or CAPE (Shiller PE). Long-Term Interest Rates (rhs) is the 10 year US treasury yields, or equivalent long term rate.
The market expects returns to fall across all major asset classes over the next 5 years
Source: Bloomberg and First Sentier Investors proprietary models. These are expected returns based on internal assumptions as at 30 June 2020. They are predictive in nature and therefore not guaranteed to occur. Known or unknown risks and uncertainties and inaccurate assumptions may result in them differing materially from results ultimately achieved.
Where does a real return strategy fit within a broader portfolio?
Investing in an objective-based multi-asset strategy with flexible investment ranges free your manager to deliver more consistent returns with less risk, but how can a fund that moves in - and out - of asset classes fit within your broader asset allocation?
Here are three ways an objectives-based fund can be used in your portfolio:
An objective-based strategy can be added to the equities segment of your portfolio with the aim of delivering 'equity-like' returns with lower volatility.
An objective-based strategy could fall into the 'growth alternatives', 'defensive alternatives', or 'absolute return' categories, depending on the fund.
Core or whole portfolio solution
Use your objective-based strategy as a one-stop-shop for delivering on an overall portfolio objective - including outsourcing of asset allocation and governance.
Disclaimer: Reference to specific securities (if any) is included for the purpose of illustration only and should not be construed as a recommendation to buy or sell the same. All securities mentioned herein may or may not form part of the holdings of First Sentier Investors’ portfolios at a certain point in time, and the holdings may change over time.
Whitepapers and other resources
Investing for purpose
This paper outlines how the Multi Asset Solutions team help clients achieve their investment goals via tailored, risk-managed multi-asset portfolios. Read more.
Research papers from the Multi-Asset Solutions team
Our experience working with institutional asset owners has given us significant insight and practical appreciation of the challenges investors face. In an environment marked by a combination of low interest rates, low inflation, low to moderate economic growth, and risk-on risk-off investment sentiments, we share our research into techniques and solutions that can help achieve long-term investment objectives.
Volatility as an asset class and dynamic asset allocation
Integrated approach to asset liability management risk budgeting and alpha
Inflation-linked investment objectives with liquid asset portfolios
Target benefit retirement schemes
Liability driven investing: hedging inflation and interest rate risk
Regimes, turbulence and absorption – A new way of looking at risk
Multidisciplinary portfolio management
Our corporate RI strategy is based upon three strategic pillars of quality, stewardship and engagement.
As global multi-asset investors, we partner with our clients to provide solutions that maximise the probability that they will achieve their investment objectives. We assess our client needs based on three key criteria: risk tolerance, investment horizon and return ambition level. We utilise third party monitoring services for our direct holdings.
Learn more about the Multi-Asset Solutions team's approach to Responsible Investment