“Ultra-loose monetary policy has seen a rally across a majority of asset classes to levels where valuations are no longer supportive,” said Al Clark, global head of multi-asset at Nikko Asset Management.
The expectation of higher volatility is one reason global investors increased their searches for multi-asset products by 33% year-on-year in 2013, according to an April survey by Mercer.
The same survey found that institutional investors in Asia placed the largest portion of their assets into multi-asset strategies.
Clark points to a shift in Asia in the type of investor buying into multi-asset income solutions.
“Historically, the greatest interest was from the institutional space and interest from the retail segment is a more recent development. We expect growth to come from all client channels.”
Multi-asset class funds use dynamic asset allocation strategies intended to beat different market cycles, generate returns, and at the same time control downside risk.
Schroder, for example, is less bullish on equities now that valuations have been priced into the global economy recovery. That said, equities are still the preferred asset class for the firm, said Garth Taljard, head of multi-asset products in Asia.
“As valuations become less attractive, earnings growth will be increasingly important to keep the market buoyant. Although earnings momentum remains positive, it is yet to show a strong enough trend to [support] valuations, hence our less constructive outlook,” Taljard said.
Japan and emerging market equities look positive to Schroder, while it has a neutral view on the US and Europe.
Taljard is more optimistic on Japan now that uncertainty about the April sales-tax hike has passed, pension reform is underway and a reduction of corporate income tax to 30% from 36% is planned in stages.
On other Asian markets, he said: “The overweight position in Asia was broadened out into emerging markets recently. The cyclical improvement could lay the foundation for a sustainable earnings-led upgrade across emerging markets, which, given historically low valuations, make the region attractive.”
Seeking real dividends
Taljard likes dividend-paying opportunities, particularly in Australia, Singapore and Hong Kong, with telecoms and banks as favoured sectors.
On the other hand, India and Korea offer less attractive dividend-paying equities.
“Stocks that we would avoid are those that seem to pay a high dividend yield on paper, but in fact the business is not profitable enough to sustain the dividends. We also tend to find less investment ideas for some markets, which do not typically reward investors through dividends, such as India and Korea.”
Like Schroder, Nikko too has an overweight view on Japan and prefers Europe the least, while Asia and the US are in the neutral to slightly positive range.
In Asia, a rising tide has lifted all boats, and most Asian equity markets are on the expensive side, said Clark.
“The exception is China, where equities remain cheap given the well documented risks around potential misallocation of capital, particularly in property markets.”
However, Nikko remains neutral on China equities due to macroeconomic concerns.
The US economy is recovering and corporate profits are expected to rise, but further “large gains” are constrained by the high level of company profit margins and rich valuations, Taljard said.
“In Europe, the strong performance in equities has been mostly driven by re-rating, implying that investors are building in a significant earnings rebound in Europe. The high expectation of investors might lead to further near-term underperformance,” Taljard adds.
In fixed income, Asian credit has attractive yield spreads, according to Schroder. The fund house recently increased exposure to quasi-sovereign and sovereign issuers in India and Indonesia due to positive political developments that are seen as lifting market sentiment.
“Given the sanctions on Russia, we have seen some investors reducing their exposure to the country and moving into Asian credit. As spreads remained wider in Asia compared to other regions, we might see further cross-over flows into Asia, providing support for the market,” Taljard said.
Nikko also likes Asian credit over credit instruments in other regions globally. The extra pick up in spreads “more than covers the perceived extra risk”, Clark added.
Bonds, however, are different. In a broadly balanced portfolio under current market conditions, Nikko would be underweight sovereign bonds, he said.
“Sovereign bonds are expensive, but they can still play an important defensive role in a multi-asset portfolio while inflation remains contained.”
Nikko prefers sovereigns with a relatively higher yield like US treasuries or UK gilts over Japanese government bonds or German bunds “where the potential payoff looks asymmetric”.
To address the growing demand for multi-asset solutions, Nikko Asset Management recently created a specialist portfolio management team in Singapore by integrating its global multi-asset capabilities and assets under management.
Schroder, a multi-asset specialist, recently launched a global asset allocation fund that follows an unconstrained equity investment strategy.
“Investors are increasingly seeing the need to move beyond a simple check-list of products,” Taljard said.
Other fund houses like Manulife and Franklin Templeton have also recently announced capabilities to expand their asset allocation range.