Speaking in Sydney yesterday, Investec portfolio manager Michael Spinks said asset classes are becoming more closely intertwined and investors should therefore re-think the way they look at diversification.
“In this environment, investors need to be aware that the old rules of diversification do not necessarily apply,” said Mr Spinks.
“Financial markets are an increasingly multi-dimensional world, so investors need to closely examine their portfolio allocations to look at the underlying drivers of asset returns to determine if they are truly diversified,” he said.
Mr Spinks explained that investors should focus on asset class behaviour.
Current macroeconomic factors – such as improving global growth underpinned by falling oil prices – will mean that certain asset classes will outperform.
“Growth assets – such as equities, high-yield bonds, emerging market debt and property – tend to have returns directly related to expectations to real economic growth,” he said.
Conversely, defensive assets "react positively" as expectations for economic growth decline.
Mr Spinks said while there is currently value to be found in growth assets – noting a preference for Japanese equities – investors do need to invest across asset classes, he added.
If you are looking at “surviving what is clearly a low rate environment”, it is “about breadth of opportunities, depth in the position taking, willingness to be active, and understanding the nature of what it is you’re buying", Mr Spinks said.
“Multi-asset strategies – those that utilise a truly diversified approach – may provide efficient integration of the key components needed to reduce return variability, as well as providing the potential for a strong level of returns,” he concluded.
