In Lombard Odier latest CIO Office viewpoint special report, the Swiss wealth and asset manager argues that higher rates mean that proportionately less risk is needed to achieve equivalent returns. Consequently, investors should set up simpler portfolios that take into account their total wealth.
Lombard Odier has revised its strategic asset allocation (SAA) to reflect these shifts.
In particular, a higher-rate environment means higher expected investment returns for fixed income in the coming years. This means Lombard Odier’s portfolios will focus on core regions and exposures, as well as harnessing the potential returns available through private assets where appropriate.
Indeed, higher expected returns in the decade ahead, particularly for fixed income, call for simpler portfolios with fewer non-core exposures. The bank has raised its strategic allocation to fixed income in more risk-averse client portfolios, and extended bonds’ duration across portfolio risk profiles in anticipation of falling interest rates.
“Government debt now offers a higher rate of return for lower risk than other asset classes,” says the report, co-authored by global chief investment officer, Michael Strobaek, head of asset allocation, Christian Abuide, and multi-asset portfolio manager, Paul Besanger. They also see opportunities in corporate investment grade credit, as well as equity-like returns among the high yield bond sector.
Nevertheless, the money manager is also strategically positioning portfolios by increasing core equity exposures, including US equities. Equity returns are, and will be, mostly driven by earnings growth, and although the last decade’s exceptional corporate profits will be hard to repeat, Lombard Odier believes corporate margins will partially normalise but remain above historical averages.
“Equities remain a core holding,’ according to the report.
In the context of a total wealth approach, private assets — including private equity, debt, infrastructure and real estate — can add diversification and returns, said Lombard Odier.
“Private assets are an integral part of our strategic asset allocation…In relative return terms, private equity should retain an edge over public markets.”
Lombard Odier believes that hedge funds also belong in a well-diversified strategic asset allocation, because they should outperform cash – but manager selection is key given wide dispersion between different funds’ performance.
