How Pendal’s head of multi-asset is thinking about equities, bonds and alternatives right now

There’s a relative calm in markets after several years of volatility in inflation, interest rates and markets. Investors should take the opportunity to examine their portfolios, says Pendal’s MICHAEL BLAYNEY

• Aussie equities, bonds relatively attractive
• Less need for alternatives, credit
• Find out about Pendal’s multi-asset funds

FINANCIAL markets have shifted to a “more normal” environment in recent months, meaning investors should think about portfolio allocation in a more traditional way, says Pendal’s Michael Blayney.

“Investors should maintain a balanced mix of equites and bonds and some alternatives,” argues Blayney, who leads Pendal’s multi-asset team.

Here Blayney explains his latest thinking on key asset classes.

Equities

“On Australian equities, we have a fairly constructive view. You have a market that offers pretty good dividend yields and you get franking.

“Also the Australian market tends to be less efficient than some other markets and you can get a better level of alpha from active management,” he says.

Blayney  believes Australia equities are now around fair value, so it’s worth maintaining a “good exposure”.

“Aussie equities aren’t an exciting growth market like Wall Street because we don’t have those big technology stocks. But what we do have is a steady-yielding market.”

On a long-term basis, international equites remain attractive because of the diversification benefits around sectors and countries, Blayney argues.

The development of artificial intelligence, and its impact on portfolios, is top of mind for many investors.

“AI has created a lot of excitement – particularly in those ‘Magnificent Seven’ tech stocks – and pushed up their valuations,” Michael says.

The technology has the potential to transform many businesses and the economy – generating significant improvements in productivity.

But the market has run a bit ahead of itself, Michael argues, with the seven stocks – Apple, Alphabet, Microsoft, Amazon, Meta, Tesla and Nvidia – “priced for perfection”.

Markets have moved into a consensus view of a Goldilocks economy – that the US Fed has moved rates enough to bring inflation under control, but not enough to crash the economy.

“There is a good long-term case for international equities, but in the short term, markets have already priced in all the good news at the mega cap end of the market.

“If anything does go wrong, then that skews the risks towards the downside, so we maintain a small underweight position.”

Bonds

“We still really like bonds,” Blayney says. “There’s a yield cushion in case of further volatility.

“If you’re starting point is 1 per cent then you don’t have much of a cushion. But we’re starting at around 4.5 per cent.

“Bonds are around fair value, or slightly cheap, and they have the potential to give you diversification and liquidity in a risk-off type event.”

Another benefit of bonds and cash is that they provide “dry powder”, Blayney says.

“While markets are calm now – with the VIX (volatility index) low – we know they will be volatile again.

“It’s important to have liquid assets like cash and government bonds to take advantage when that volatility comes.”

Alternatives

Alternatives should still be part of a portfolio, says Blayney. But with bond yields higher, investors don’t need as big an exposure to alternatives to generate returns, compared to a low-yield environment, he says.

“It still makes sense to have some of them because when you do see spikes in inflation.

“Some of the inflation-linked assets like commodities or certain types of listed infrastructure can be really useful.

“But right now in a relative sense, with bonds and cash being more attractive, the need for larger alternative allocations has reduced.”

Blayney believes investors should be cautious on credit.

“I would stay away from high yield because you are just not being paid enough for the downside risk.

“On investment-grade credit we are a bit more neutral.

“Overall we think investors should keep their defensive assets high quality and liquid, to ensure they’re well placed to deal with any volatility that 2024 may bring.”

About Pendal’s multi-asset capabilities

Pendal’s diversified funds provide investors with a variety of traditional and alternative asset classes and strategies.

These include Australian and international shares, property securities, fixed interest, cash investments and alternatives.

In March 2024, Perpetual Group brought together the Pendal and Perpetual multi-asset teams under the leadership of Michael O’Dea.

The newly expanded nine-strong team will manage more than $6 billion in AUM and create a platform with the scale and resources to deliver leading multi-asset solutions for clients.  

Michael is a highly experienced investor with more than 23 years industry experience, including almost a decade leading the team at Perpetual.

Find out more about Pendal’s multi asset funds

Contact a Pendal account manager here