October 2015


James ElliotJames Elliot, a chief investment officer within multi-assets at JP Morgan Asset Management, tells Funds Europe about the evolution of multi-asset funds and how the strategy is invested. “Multi-asset funds aren’t new; ‘balanced’ funds have been around forever,” says James Elliot, chief investment officer of multi-asset solutions at JP Morgan Asset Management (JPMAM). And of course, he’s right. Investors have been using funds split between equities and bonds for a long time and it is still a very popular way of investing.  Perhaps all that’s different is the name, unless the fund includes a variety of asset classes apart from plain vanilla government bonds and developed market equities. Elliot – whose multi-asset business runs $152 billion (€134 billion) of assets under management – explains that multi-asset has even moved into asset classes such as real estate and private equity. “Multi-asset has moved away from simple, plain balanced funds to a more diversified set of building blocks,” he says. The motivation behind greater diversification is a search for income, a natural response in an environment of unprecedented low yields.  Current market conditions have made the need to be nimble with asset allocation more critical then ever. As Elliot says, this summer saw a double dip in bond yields and commodities, extinguishing the bull market in Chinese stocks, ushering in a bear market in emerging market equities and a correction in developed market stocks. Where to allocate assets in this context is crucial. JPMAM has a global research team and “research is core to our DNA”, says Elliot. The firm remains cautiously optimistic on risk assets and with a preference for developed markets. Greater uncertainty over the outlook for growth and policy has led the firm to de-risk portfolios even as their underlying expectations are for positive, if unspectacular, global growth.  AFTERSHOCKS
Elliot says that in the current market, his preferred overweights are US, Eurozone and Japanese equities, US high yield, Australian bonds and the US dollar. The multi-asset portfolios have preferred underweights in cash, emerging market equities, Canadian bonds and the euro. “This is no market for heroes,” states Elliot. He accepts that a strong dollar, coupled with weak energy prices, has wiped a year of earnings growth from US stocks and acknowledges that Europe remains prone to aftershocks and political risk as the “economic wounds of the crisis slowly heal”. Nevertheless, he sees that domestic US strength warrants a rate hike and a normalisation cycle and Europe’s first post-crisis test, Greece, “caused barely a blip on the radar”. So why the collapse in confidence and conviction? “Growth is low by historical standards. Policy is unusual and after two decades of globalisation, we are in a brave new world which challenges our assumptions about the underlying plumbing of the global economy,” says Eliot.  While sluggish growth may appeal to optimists who believe a muted recovery has more scope to persist, pessimists may think that the world is just one shock away from a recession. Elliot seems to be in the optimist camp, saying: “The collateral damage on S&P earnings will heal.” He’s less bullish on China though, whose challenges continue to weigh on emerging markets and commodity-producing countries. This, in his view, may further stunt global growth into next year. But China is a divisive issue. “While it’s true that China accounts for around one-third of world nominal GDP growth since the crisis, International Monetary Fund projects have this falling to around one-fifth in 2016. The US and, increasingly, Europe drive global growth,” says Elliot.  He reckons that the Chinese slowdown will be felt most in small, open economies but does not think that it will affect the recoveries in more developed markets, such as the US and Europe. “The downside risks centre around a currency crisis in emerging markets and the associated reserve de-accumulation pushing bond yields sharply higher; to the upside, decisive emerging market policy response or a more widespread acceleration in developed market productivity levels could give markets a powerful boost,” Elliot says. To take advantage of emerging market currency risk, his plan is to go long the dollar and short an emerging market currency. Not only does this strategy confirm the fears over emerging markets, but it also reinforces Elliot’s faith in the strength of the US economy.  HOW ATTRACTIVE?
Discussing the popularity of multi-asset as an asset class, Elliot says that investors want to be more active when making asset allocation decisions. Clients are also less willing to pay for traditional beta-like returns that should be higher and are still willing to pay for very active management with a track record of delivering. Before summer’s equity and bond slumps, a traditional balanced fund would have gained decent returns.  Elliot says his firm’s Global Balanced Fund, which had €1.7 billion in assets last month, has an equities/bonds split of approximately 50/50, the objective being to outperform the benchmark over the long term.  But Elliot maintains that relying on long-only beta in traditional equities and bonds to deliver returns “through the lurches” in today’s global markets is not enough any more.  He says that in this environment, investors need to think about diversifying their long-only exposure in order to achieve positive risk-adjusted returns. This can be done by increasing exposure to relative value, derivatives and volatility strategies. One fund that targets these strategies is the Global Capital Appreciation Fund, which has €384 million in assets.  While taking on maximum risk has been a decent plan for the past five years, Elliot does not think that this is wise now and investors should scrutinise where they are taking that risk.  He believes that structural and cyclical trends in the global economy are the primary driver of all asset class returns, and investors would benefit from taking this approach to portfolio construction, while remaining flexible about how they allocate assets. ©2015 funds europe

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