Alternative assets a winner when equity-bond mix is not enough

Staff Writer

Financial Newswire

4 October 2022

Alternative assets, active asset allocation, and being underweight equities and bonds in the first half of calendar 2022 proved a strong combination for the Pendal Sustainable Balanced Fund, winner of the 2022 Financial Newswire-SQM Research Fund Manager of the Year Multisector Growth award.

 Michael Blayney, Head of Pendal Group’s Multi-Asset team, said from a balanced fund perspective, the biggest challenge this year was when “diversification didn’t work” – with a vicious selloff in bonds and falling equity prices at the same time.

“That was something that looks a lot more like 1994, the last time people got really scared of inflation,” he said.

“That meant, certainly for that first six months of this calendar year, we were underweight both equities and bonds, and that obviously helped us a lot. That was due to our process using both valuation and technical indicators, and also our qualitative assessment of the market cycle.”

Another positive factor was the fund’s exposure to alternative assets, particularly wind generation and solar assets in the UK and Europe.

“We use a blend of strategies in alternative assets, and the key things that have really helped have been some exposure to sustainable listed infrastructure and, we’ve got quite a strong renewable energy focus in there, and that actually gives us some positive exposure to energy prices in Europe,” Blayney said.

“If you think of balancing a portfolio, you can’t really get that type of exposure through your equities, but through your alternatives. So having alternatives proved to be a very valuable thing.”

Active asset allocation was also key.

“Over time, correlations between equities and bonds are not stable and not always negative, so it just highlighted that you do need other things in portfolios,” Blayney said. “You still need bonds, and they’re great for when you get an economic downturn, but you need alternatives, you need to manage your asset allocation actively. So the last six months really highlighted that investors really need to go beyond that simple equity-bond mix and think a bit more broadly.”

Runner-up in the Multisector Growth category was the Dimensional World Allocation 70/30 Trust, a fund of funds which has allocations to Dimensional’s underlying Australian Core Equity and Global Core Trusts (hedged and unhedged), Emerging Markets Sustainability Trust, and Global Bond Trust.

Bhanu Singh, Head of Asia Pacific Portfolio Management at Dimensional Fund Advisors, said aside from its broad 70/30 stocks/bonds mix, the equity portion of the portfolio is tilted to small cap, value, and more profitable stocks that research shows drive higher returns over time.

“While the third and fourth quarters of 2021/22 were difficult for both stocks and bonds, value stocks were one of the few bright spots,” Singh said. “By staying consistently focused on the value premium, the World Allocation Trust was able to reap the benefits of the realised value premium being positive in the past year. That was a good outcome for investors.”