The prospect of a painful earnings season and the challenge that the traditional 60/40 equity and bond allocations are offering little diversification benefits have led investors, including insurers, to stick to defensive strategies.
Amid central banks’ whatever-it-takes approach to salvage the markets, bonds and equities have moved in the same direction, causing many to seek protection in assets such as the Japanese yen.
Aviva Investors’ $1.58 billion AIMS Target Return Fund, in which roughly half of the 86% institutional capital was sourced from Aviva’s insurance business, has already taken a defensive position, said Mark Robertson, head of multi-strategy funds at the asset management arm of the insurer.
“Exposure to risk assets, most notably within equity and credit, was reduced as the quarter unfolded,” he told AsianInvestor.
“At the same time, reliance on defensive strategies such as duration and ‘safe haven’ currencies like the Japanese yen was increased to limit the portfolio’s sensitivity to potential further downward revisions in global growth,” Robertson added.
While the S&P 500 regained some lost ground recently, Sean Taylor, DWS’s chief investment officer in the Asia Pacific and head of emerging market equities, said that Asian investors would rather protect their portfolios for now.
“Depending on their mandates, I would have thought that generally, they [Asian institutional investors] would be reasonably defensive at the moment, not believing in the recent rally so much because the actual economic data is going to be a lot worse," he said. The S&P 500 has risen over 25% from its lows in March as of April 24.
A Bangkok-based insurance executive said earlier in March that the firm will not increase exposure to risky assets for the time being, primarily equities, until positive signs of the virus abating in Europe and the US emerge.
Investors are undoubtedly bracing for further volatility ahead of the US earnings season. As of April 24, 107 companies of the global benchmark have reported earnings, according to Refinitiv. While 62.6% have performed better than analysts’ profit forecasts, earnings of the index overall are expected to drop by 13.7% year-on-year.
Overall negative consumer sentiment in the near future will further weigh on spending and investment, exacerbating the impact on corporates on top of the existing damages done by global lockdowns.
BROKEN GOLDEN RATIO
As investors move to cushion their portfolios from being battered by potentially a new wave of volatility, such as adding more government bonds, they are left in an asset allocation conundrum as the traditional 60/40 ratio of equity and bond looks to have broken down.
With central banks, such as the Federal Reserve and the European Central Bank, buying a tremendous amount of government and corporate bonds, prices of these assets have gone up. But such stimulus has also caused equities to rise, challenging the fundamental premise of the strategy, which supposedly offers investors diversification benefits when these two asset classes move in opposite directions.
“The assumption that a balanced 60/40 equity/bond portfolio provides enough of a diversification buffer will and is being challenged,” said Robertson.
“Credits have gone up with equities recently, that's been purely helped by the central bank, that the Fed has been buying credit,” Taylor said.
In Bank of America’s investor survey in April, the proportion of fund managers who considered US government bonds to be the best hedge against market routs have dropped to 22% from 52% in March.
“We will have interest rates incredibly low for quite a long time, so that's a good underpinning and really there's no alternative to buying equities in the medium term,” said Taylor.