Spreading exposure with a range of assets

James Elliot, JP Morgan Asset Management's managing director.
James Elliot, JP Morgan Asset Management's managing director.PHOTO: JP MORGAN ASSET MANAGEMENT

Investing in a combination of asset classes in a single investment portfolio - known as multi-asset investment - is here to stay. JP Morgan Asset Management (JPMAM) managing director James Elliot tells Wong Siew Ying that is because investors are seeking more diversified exposure to different markets, as they assess their risk appetites and income needs. This is the latest in our series featuring fund managers and leading market experts.

The multi-asset investment industry looks set to grow as investors are seeing the value of asset allocation strategy in planning their investments.

"There is growing recognition of asset allocation as a primary determinant of long-term success in people's overall investment exposure," says Mr James Elliot, who is also chief investment officer of the International business of the Multi-Asset Solutions at JPMAM .

As at Sept 30, JPMAM Multi-Asset Solutions managed US$ 172.1 billion (S$242 billion) in multi-asset class products.

This includes the Global Income Fund - available to retail investors here. The fund invests primarily in a portfolio of income-generating securities, globally and through the use of financial derivatives instruments. About 30 per cent was invested in high-yield sectors and nearly 20 per cent in global equities as at end September. By country, over half the fund's exposure is in the United States. London-based Mr Elliot says the firm takes a positive view of the US economy, and it is one of the common themes running through the firm's portfolio.

Q What are the characteristics of multi-asset investment funds?

CHANGING NEEDS

The older you are, the less appetite you have for exposure to volatility and risk because you have a shorter timeframe. Our glide paths of our funds for retirement planning tend to suggest that people in their early years start at 85 per cent equity and 25 per cent fixed income.

JAMES ELLIOT, JP Morgan Asset Management (JPMAM) managing director

A The common characteristics are that they are invested in a range of different asset classes, but using predominantly a mixture of equity and fixed income strategies.

Your traditional balanced funds would either have been a mix of, broadly speaking - 30 per cent equities and 70 per cent bonds, through to 60 per cent equities and 40 per cent bonds. But over the last few years, that traditional balanced approach has become more diversified.

Q What are the key benefits of adopting a multi-asset strategy?

A You have access to a very broad opportunity set. You are not dependent on a limited set of variables. If you are invested only in emerging market equities, you are hostage to two things: first, it is the macroeconomic development of emerging markets and second, the risk in equity markets in general.

If you are invested in a broad multi-asset fund, you have a much broader set of risk variables you are exposed to, and as such you have exposure to return streams that will generate returns at different times in the overall life cycle of markets, which will reduce overall portfolio volatility over the long run.

Q What are the returns for your multi-asset funds like?

A We have a lot of different funds with different returns. As a broad observation, I would say that, post financial crisis, both equity returns and fixed income returns have been very positive. That's in part been a function of unconventional monetary policy and quantitative easing.

As central banks have reduced interest rates, and undertaken quantitative easing, it has had an effect on asset prices - both in equity and fixed income. So, markets on traditional long-term valuation measures are no longer cheap as they were five years ago. That means that over the longer run, at least market valuation levels, we are likely to see slightly lower returns.

Over the longer run, our longer-term capital market assumptions are still assuming that a traditional allocation of 60 per cent equities and 40 per cent bonds will still return in the region of 6 per cent to 7 per cent, even at these asset price valuation levels.

Q What are the common themes that run through the portfolio of funds which your team looks at?

A Implementation of our views can vary across funds due to different portfolio objectives, opportunity sets and time horizons. However, there are some common themes. We have a preference for developed market equities relative to emerging market equities, and within developed market equities, we have a preference for US equities over most other markets. I think we remain relatively positive on European equities on a valuation basis and also on the basis of the effects the European Central Bank quantitative easing has had on credit channels in Europe.

Within fixed income, we continue to like US high yield over emerging market debt. I think US corporate margins remain relatively robust, with commodities prices low and wage growth remaining relatively low in the US, margins are likely to remain pretty positive and as such, high yield within the US in an economy that continues to perform very well, is an area that we still like. We also like the US dollar on a long-term basis because of our view on the US economy.

Q Is Asia still very much in favour with investors, despite the slowdown in China?

A We like Asia for long-term exposure to a growing consumer across both Asia and other emerging markets. We think that is a 20- to 30-year investment story, but will be a critical part of overall global growth, and the demand side of the economy in the long run.

On a shorter-term basis, while we remain in that transition period in China, our views on emerging market equities relative to developed market equities, we have a preference for developed market equities at this particular point.

But I think over the long run, everyone should be looking at how they can get exposure to emerging middle-class consumers, not just in China but across Asia and emerging markets.

Q How would the multi-asset allocation strategy differ between a young investor and an older one?

A There is no right asset allocation strategy for everybody together. For a younger person, should he have more stocks? Yes, because he has a longer life cycle, he should look to get more exposure to equity risk premium over the long run, to generate a higher level of return.

The older you are, the less appetite you have for exposure to volatility and risk because you have a shorter timeframe. Our glide paths of our funds for retirement planning tend to suggest that people in their early years start at 85 per cent equity and 25 per cent fixed income.

By the time you get to retirement age, you would have more like 85 per cent fixed income and 25 per cent equity exposure. Increasingly, people are living longer, so I think it is quite important to maintain some equity exposure in retirement as a higher-returning asset, because if you are retiring at 65, you could live for another 25 years.

Q Looking at the macroeconomic environment, what are the risks that investors should be mindful of?

A The upside risks are that the US economy is still mid-cycle, and US consumer spending continues to grow at about 3.5 per cent. Unemployment is low so labour markets look pretty healthy, while the fall in the oil price is a benefit to all developed market consumers.

Most of the challenges remain around the risks associated with the transition that is ongoing in China, moving away from fixed asset investment towards a more balanced economic model. Over the long run, that is a very positive thing, it is very much a deliberate policy initiative within China. But that re-balancing will take time.

A version of this article appeared in the print edition of The Sunday Times on November 08, 2015, with the headline 'Spreading exposure with a range of assets'. Print Edition | Subscribe