Investors are taking a cautious stance at the moment and this is exactly the right time to be defensive, according to Matt Bullock, EMEA head of portfolio construction and strategy at Janus Henderson.
“One of the biggest trends is investors are continuing to be nervous about markets,” he said, due to volatility associated with Donald Trump’s presidency, instability in eastern Europe and concerns over Chinese growth and trade wars.
“There is overall a cautious mentality from our investors. When making allocations they are trying to avoid areas where there is perceived risk and move towards safe haven areas.”
To do this, many are putting their equity allocations in the US, where the strength of the economy and the dominance of the ‘Magnificent Seven’ tech names make it a safer bet than other markets.
“That is the pull factor but there is also a push factor – try to justify going anywhere else but the US in these conditions,” Bullock noted.
In the bond space, his clients are being conservative by moving into high-quality investment grade credit and government bonds. This is something he agreed with, noting that “now is not the time to be particularly brave in portfolios”.
These positions have been in place for “the past three or four months”, he concluded.
Why asset managers need to be brave
While intermediaries and private investors can afford to be more cautious, fund managers charging active fees must remember to take anti-consensus positions if they want to outperform over the long term.
“The active industry is under pressure from passive indexes so how do we get the best chance? We have to be strong and brave in our views. The risk is investors get scared of performance in the short term and as a result don’t put the risk in they should be,” he said.
“It’s hard to balance those. You want to keep your investors happy but to be true to what you believe in, you need to be able to take the risk of short-term underperformance.”
This is becoming a particularly difficult balancing act as investors have become more short-termist, with holding periods falling over the past few years.
“The pace and volume of information that is out there in the marketplace means people are acting off more information,” he said, something that has come about from the “evolution of social media”.
“Investors are always comparing to a benchmark and it is very difficult to have periods of underperformance. It is hard to resolve that. It is hard to keep a client comfortable,” Bullock added.
This short-term mindset, he argued, “rarely generates positive returns” and can lead to investors “panicking” by taking risk off the table too quickly.
If they have a three-to-five-year view, however, short-term noise should make little difference to investors’ portfolios. “We look at the noise in the marketplace and ask if that changes our philosophy over that time. If it does we have to act. But very rarely does something change your long-term asset class views,” he noted.
So what would he do now?
Approaching the question as a long-term investor – someone who does not need the money in the next three-to-five years – he said he would have 100% (or close to it) in equities, as he does not “feel the need” for bonds in a portfolio with a longer time horizon.
Bullock would be overweight the US but would tilt his allocations to the small and mid-cap space, which he described as “really exciting over the next several years”, while the large-cap end is “getting a bit toppy for some people”.
He would also allocate more to Asia and emerging markets, which are “exceptionally cheap”, especially China.
“The Chinese government will do anything possible to prop up the economy and the market in the short-to-medium term should benefit from that,” he argued.
For the rest of the portfolio, he would be “reasonably neutral” in other areas, with slight underweights here and there but broadly consistent with market allocations.
“I usually hate saying that because it goes against what I said about active managers being active,” he said, but for now investors should “enjoy the returns of the past 12 months and get ready for the next stage” when more active decisions will need to be made.