How these investors are positioned across stocks, bonds and cash

For Australians looking to grow their wealth, two main areas dominate discussion: real estate and stocks. The first of these is one that often stirs debate, as we saw in the fiery comments on the recent Livewire post by financial adviser Sebastian Ferrando.

And when it comes to stocks, we’ve just wrapped up a half-yearly results season that has delivered a higher proportion of beats versus misses than many pundits anticipated.

There’s another type of investing that’s less understood – multi-asset – which involves running a diverse portfolio comprised of differing combinations of stocks, bonds, real estate, credit, or cash. Typically run by professional teams investing across global markets, such portfolios must also consider the macro environment, including geopolitical events.

In the following wire, the first of a two-part series, we speak with multi-asset investors from three renowned investment houses:

• Ben Inker, co-head of asset allocation, GMO, 
• Alexandre Ventelon, head of research and investment strategy, Morgan Stanley Wealth Management, and 
• Dan Farmer, chief investment officer, MLC Asset Management. 

We delve into how they allocate across different asset classes and how external considerations, such as geopolitics, influence their investment decisions.

How do you decide which asset types to hold in your portfolio, and which to prioritise?

“We look at how much we are getting paid for taking various kinds of risk. For example, the more we're getting paid for taking equity risk, the more equities we're going to hold,” says GMO's Ben Inker.

“Today, we can find a wide array of equities that we like, with equities currently making up about half our portfolio.”

While this level can be substantially lower, it can also exceed 50%, such as during 2009, “when equities were cheap and bond yields were really low.”

“We now have this nice situation where there's plenty of equities to own. You're getting paid decently for owning most equities,” Inker says.

He also notes that bond yields are again reasonable, “for the first time in a very long time” as are cash yields, which is also helpful for alternatives.

“We can find plenty of stuff to do across all three segments of the portfolio and that's a nice situation to be in,” Inker says.

“It means that everything has to fight its way into the portfolio because, to buy something we really like, we have to sell something we kind of like.”

How Morgan Stanley Wealth Management builds its book

Alex Ventelon and his team keep an eye on around 40 asset classes, with their investment selection process starting with the strategic asset allocation (SAA). Describing this as “the backbone of our portfolio,” Ventelon says this takes a neutral exposure to Australian equities, US equities and other areas of the market.

“Every month we have a tactical asset allocation (TAA) review of the whole portfolio, looking at all the investible asset classes in our universe, the big ones being equities, bonds, cash, FX alternatives and private markets,” he says,

They then look at all the factors underlying these, including region, sector, factors, and style, such as growth versus value. This process also involves an assessment of the return expectation for each asset close over multiple timeframes, including 12 months and the shorter-term three to six-month period.

“For the shorter periods, we use a systematic process that helps us get to a view on the asset class, based on macro, valuation and other types of factors,” Ventelon says.

These asset classes are then scored according to the potential return outlook and the conviction of different team members. This is used to create an overall score to decide on the TAA.

Ventelon emphasises it also looks across other non-equities parts of the market, weighing the team view on each market before then drilling down to specific regions.

“Very often, the more exotic the asset class, the more constrained the allocation will be because of greater tracking error,” Ventelon says.

An “opportunity-rich” investment environment

MLC Asset Management's Daniel Farmer also regards the current environment as “opportunity-rich”.

“As ever, capital allocation discipline is important as the greater number of opportunities currently available also means there is a greater potential of misallocating clients’ capital,” he says.

With a long-term focus, some of the areas he calls out are in private credit, where MLC is investing in parts of the loan market, including speciality finance, “which are offering very attractive income-driven returns at a fairly moderate level of risk.”

In equity markets, MLC invests broadly in global equities, not just in the US. Some areas of focus include mid-cap Australian equities and emerging markets.

How do you navigate through macro and geopolitical concerns, while also finding assets that will provide reasonable returns?

GMO’s Inker regards geopolitical risks as particularly difficult to navigate, “because most of the things you really fear are relatively low probability but really nasty. The more likely things just don't matter as much.”

“The geopolitical nightmare that people talk about today is China invading Taiwan, which would be a disaster for the global economy,” he says.

While it's not impossible to envision, Inker also says it’s not a likely scenario. For Inker and the team, keeping such potential scenarios in mind when building portfolios is about focusing on assets that will survive such events – not seeking to select those that will benefit from any given event.

“With something that bad for the global economy, it is hard to envision not losing some money, but we want to make sure our portfolio does not take such big losses that it can’t recover,” Inker says.

“The goal with geopolitical events is to make sure you are diversified and don't have too much individual risk.”

Another big ongoing risk, which Inker regards as a clear and present danger, is recession: “The timing of a recession is uncertain but there certainly will be a recession.”

“I can't manage a portfolio, either with the certainty that a recession is not going to come, or that is guaranteed not to lose money in a recession. What we're looking for is where can we find risky assets where you are getting paid adequately, or better, for taking that recession risk.”

In this case, Inker says the risk is not just around whether a recession occurs but also how much of a shock it presents for investors.

“Most recessions don't even matter all of that much. If you look back a few years later, they don't leave much lasting impression on the economy,” he says. 

Valuations will have fallen across many parts of the market, “but it's absolutely not a disaster. We do look out for those rarer potential downturns where things are going to be a lot worse.”

He refers to the GFC as an example of such an event, which proved a disaster for the financial sector and caused long-lasting damage.

“We don't see any reason to believe that a recession, if it were to occur now, will be one of those rare, very dangerous ones. And so, we're just looking at where are we getting paid adequately for taking recession risk,” Inker says.

“Where we think we are getting paid well, we're perfectly happy to take risk, and where we don't think we're getting paid, we're going to take much less.”

What’s on Morgan Stanley’s radar?

Geopolitics is also an important consideration for Ventelon and his team at Morgan Stanley Wealth Management.

“We’re paying attention to the geopolitical situation globally and the lagged impact of monetary tightening that could eventually cause a recession,” he says.

In the US, the financial health of consumers is something Ventelon watches closely, referring to recent indications of rising credit card delinquencies. They’re also watching the ongoing developments in Ukraine and in the Red Sea. In an Australian context, while Ventelon's team doesn’t regard this as having major economic implications for now, they also acknowledge things can change quickly.

“In the US of course we're going to have an election that will create volatility, but we are also not expecting that to have a major impact on the stock market on aggregate,” Ventelon says.

“We don't think that the stock market on aggregate, apart from short-term volatility, will have a black-and-white outcome based on the result of the election. And it's the same for the impact on monetary policy.”

“Geopolitical risk is elevated”

That’s the view of MLC’s Farmer, who notes multiple ongoing conflicts and increasing “political polarisation.” On this last point, he emphasises the shift from a single dominant global power – the US – toward a “multipolar environment”.

“But geopolitical risks are a constant presence, certainly throughout my career there have always been geopolitical risks to manage through, so in that sense, the current environment is not new,” Farmer says.

“History has shown that even the most credentialed experts struggle to consistently predict how geopolitical tensions will play out. Consequently, we think it is risky to take outsized portfolio positions based on a single uncertain outcome.”

His team’s approach considers the probability of a large range of potential future outcomes or scenarios around key macro events, testing how these could impact their portfolios.

“Looking at a wide range of outcomes, alongside a base case, shines a light on areas where portfolio adjustments can help to reduce downside risks while better capturing upside opportunities,” Farmer says.

Right now, we see some of the mid-risk assets such as private credit generating healthy absolute returns and offering a degree of defensiveness under multiple macro/geopolitical scenarios relative to equities and other more explicitly growth assets.”

Don't miss the conclusion

In the final part, GMO's Ben Inker, Morgan Stanley Wealth Management's Alexandre Ventelon, and MLC Asset Management's Dan Farmer delve into their view on global equities and detail how they're currently positioned across asset classes.