Multi-Asset with David Vickers, Russell Investments

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  • 07 mins 10 secs
David Vickers, Senior Portfolio Manager, Russell Investments, discusses how multi-asset is performing in the current economic climate, why now is a good time of multi-asset, managing downside, key risks to consider and his approach to asset allocation.


PRESENTER: To discuss how multi-asset is performing in the current economic climate, I’m joined by David Vickers, who’s a Senior Portfolio Manager for Russell Investments. So, David, it’s good to have you with us today.


PRESENTER: So the market has seen some changes of late. So how does the land lie in terms of the investment environment?

DAVID VICKERS: I don’t think much has actually changed from last year. I think perceptions have changed. If you think about 2017, the outsize returns certainly in equity markets were driven by good economic growth, which is still with us, great earnings and expectations of earnings, and that pattern continues, but it was also driven by a lower than average inflation rate, which people I think I suspect presumed was going to continue. What you’ve had this year is just the subtle signs in the economic data that inflation is starting to come through, and that had just reset the market. Because people got used to very good growth, with a little bit of inflation not taking too much away from your real return, as inflation creeps up your real return comes down. And I think that was digested by the market and unsettled it and we had a market pricing event, but the actual landscape hasn’t really changed too much.

PRESENTER: So is now a good time for multi-asset and why?

DAVID VICKERS: I think so, but then I guess I would say that. The event we’ve had had, that extreme bout of volatility and markets down anywhere between 9% and 12% over an eight-day period, is exactly the reason why you have multi-asset, or you start with a multi-asset core perhaps. Because you can diversify away, you can minimise some of that volatility, and it enables you to add back and subtract from risk. In a single asset class you ride that particular wave all the way through. Within multi-asset, particularly because it’s usually an outsourced solution, someone is taking those decisions for you. So it allows you to try and create if successful convexity or asymmetry, so capture more of the upside than of the downside, which we’ve done on multi-asset allocation.

PRESENTER: So considering the investment environment, has this changed your approach at all in terms of tactical decisions or anything like that?

DAVID VICKERS: It’s not changed our approach. And I think that’s very crucial, I think your approach should always be consistent. I think one falls into the trap of behavioural bias when you start changing your approach per market conditions. So going into the selloff, we had been relatively, or starting to become relatively cautious. We have a process that is cycle, valuation, sentiment. So valuations were expensive. The economic cycle was good, but very much expected to be good, so scope for some disappointment. And sentiment was fully flushed. We saw certainly on the New York Stock Exchange the highest amount of retail investors coming to the market that we’ve had since 2008. The surveys were perennially bullish and it was just starting to see that everyone else was fully invested. On that basis we started to lean out of the wind.

You never quite call the top, but the probabilities of a fall have risen under those type of scenarios, and then when the fall came it enabled us to reinvest. Because it can be quite difficult when you see a lot of red on your screen and you see markets down 5% in 15 minutes, which is what we saw one evening in the US market. But you go back to that process: has the valuation changed? Well yes it had got a little bit cheaper. Had the economic cycle changed on that event? No, it was a technically driven selloff. Had sentiment changed? Yes, people were fearful. And that adage of be greedy when others are fearful starts to kick in. And you can be contrarian the other side and start to add back to risk at those lower levels. And that’s how you create that asymmetry.

PRESENTER: And how do you manage the downside?

DAVID VICKERS: Really using that process. Every asset class we think about goes through cycle, valuation, sentiment, and it’s ranked accordingly in terms of their relative risk and return expectations. So that process is absolutely crucial to minimise the behavioural bias that destroys markets, that really gives over- and under-valuations, and then it’s just using a plethora of different techniques. Certainly diversification is a starting point, but naïve diversification typically doesn’t work when you need it to. As just witnessed, everything including government bonds came down in price, and including the dollar. But having diversification with purpose does help. Having things in the portfolio that you know will act in a certain way. We had some protection in the account, some options protection. Because the odd thing about equity markets is the more expensive they get, the cheaper they become to insure, because volatility is often low as equity markets are high. So you can embed some protection in your accounts to allow you to carry perhaps that additional equity weighting that would otherwise feel uncomfortable if you had the full downside of the risk to come in a situation like we just witnessed.

PRESENTER: So what’s the key risks then to consider?

DAVID VICKERS: There are the risks we know about. That President Trump embarks upon a policy of aggressive trade action against various countries. We have a potential slowdown in China to worry about. And the authorities have started to take under control some of the insurance companies because they’re trying to clean up the financial system, and that has implications clearly for growth. We have a situation where inflation might get a little further out of control than perhaps investors today warrant, and that would come with higher bond yields, and then clearly there are all the things we don’t know about. But these risks are always present, every year a different risk will be present. The issue today is perhaps it comes with an extended level of valuation. So to draw down to an average or a low valuation is a much steeper fall that it would be normally.

PRESENTER: So how much of a concern are expensive assets then?

DAVID VICKERS: They are a concern. That said valuations do not drive markets in the short term. I would argue that the US market has been expensive, very expensive for a number of years, and it has been very strong for a number of years. Valuations work very well over a long time horizon; in fact it’s the only thing you need if you have a 10-year time horizon I would advocate. But in the short term they don’t matter. Because the market can stay irrational for longer than you and I can stay solvent as the saying goes. But it is a risk point, because the higher up one climbs, the higher one has to fall to get to a normalised level. So it’s a very big risk point, but it won’t drive markets in the short term. Although occasionally there have been instances where markets have just fallen under the weight of their own high valuations, and the tech crash was a good example of that.

PRESENTER: So considering all of this then, talk me through your asset allocation and the rationale behind this.

DAVID VICKERS: So today given that sell-off we managed to add a bit more risk back into the portfolio. So we’ve now pushed ourselves, and we run a number of portfolios, but around neutral in terms of risk. We still have a significant underweight to duration because we do think rate rises continue to come through. We do think inflation comes through a little further and faster than people have expected. But we’ve re-neutralised our equity weight now. So actually having been underweight going into that minor selloff, we are now back at weight but with a bias towards Europe, Japan and emerging markets, and a slight underweight to the US because of the extensive nature of their valuations. And then we have convertible bonds because convertible bonds provide asymmetry embedded in them. And so it’s a really good asset class to have in the top end of markets because they typically take less of the downside and capture more of the upside intrinsically in their asset behaviour.

PRESENTER: David, thank you.

DAVID VICKERS: Thank you very much.

PRESENTER: And what would you say are the key risks to consider?

DAVID VICKERS: Well there’s the ones you know about. So we have the Italian election. We do have inflation still on people’s radar. I’m not entirely sure that the market has fully digested inflation coming back in a more significant fashion. We have, potentially with President Trump we have trade issues, if he embarks on that particular course of policy. We have potentially a Chinese slowdown. They did something very interesting last night where they took an insurance company back on to the government books because they’re trying to clean up the financial system, i.e. slow unsustainable growth. But these risks are always present to be honest. There’s no more risk today than there was last year or the year before; the difference is valuations are much higher. So the scope for a misstep is, or the magnitude of a drawdown on a misstep or on a particularly bad event is much greater than it has been for some time.