The Point

Michael Blayney: A quick overview of asset classes right now

How are different asset classes faring in these rough conditions?

Our multi-asset chief Michael Blayney has a quick snapshot which you can read here.

Equities are “getting to the position where there’s some opportunities to buy. But we are not at the point of seeing broad-based bargains yet,” says Michael.

“US large-cap stocks remain expensive, while Australian equities are closer to fair value. Globally, small and mid-cap equities are fair value, or even cheap, relative to large caps.”

Bonds remain attractive because of their defensive characteristics, but still have significant headwinds from inflation. “Where possible, we have a preference for inflation protection and Australian exposure within portfolios.”

Investment-grade credit offers reasonable returns on a medium-term basis, Michael says.

“Higher bond yields have caused REITs to de-rate significantly, moving A-REITs and global REITs back towards fair value.”

Why it’s important to consider ESG in asset allocation

ESG has long been a critical factor in investing, but it’s often considered only at a company level, says Pendal multi-asset portfolio manager Alan Polley.

ESG should be incorporated into portfolios at an asset allocation level, says Alan.

“We know asset allocation is the primary driver of investment returns. It also explains about 90 per cent of the variation of returns in a portfolio.”

Asset allocation fundamentally involves three decisions, he says:

• Changing allocations between existing asset classes
• Changing the definition of existing asset classes
• Introducing new asset classes

Consider the example of climate change, he says. “Emissions intensity is vastly higher in Australia than global markets.

“So, if you think climate change is an important investment consideration, you might tilt away from Australian equities towards international developed markets.”

Michael Blayney: Stay diversified, cautious — and ready

A stockmarket rally has left some calling the start of a new equities bull market.

But investors should stay diversified with exposure to bonds and alternatives, says Pendal’s head of multi-asset Michael Blayney.

“You have to be cautious — when you look at history, you see the strongest rallies in bear markets.

“Inflation has moderated a little bit in the US but it’s still at an uncomfortably high level.”

Global markets remain “somewhere between fair and expensive, depending on where you look”, says Michael.

“Australian equities are probably one of the better-value markets but it’s not a bargain hunter’s paradise out there in any way, shape or form.”

The golden rule is to maintain diversification, he says.

Michael recommends exposure to bonds, foreign currency and alternatives.

MICHAEL BLAYNEY: The case for a balanced portfolio

One of the simplest and best ways to incrementally improve long-term investment outcomes is to rebalance — trim after strong price increases and top up after falls — says our head of Multi-Asset Michael Blayney. 

“In the present environment, this would naturally lead investors to trim cash and alternatives and top up cheaper equity and bond holdings.” 

Equity markets tend to fall about one year in three — meaning they rise the other two, Michael points out. 

“Investing in a globally diversified portfolio — with a mix of equities, bonds, alternatives, property and cash — has proven a sound strategy for long-term wealth creation over many decades, through wars, pandemics and a host of economic crises. 

“Conversely, panicking after large market falls and selling has, generally, been a wealth-destroying activity for investors. 

“You see classic examples of that behaviour at work in 2008 and early 2020. 

“We continue to believe investors should ‘stay the course’ in respect of their long-term strategies.” 

Michael Blayney: which asset classes look good now

It isn’t an easy market to invest in, but there are opportunities if you know where to look. We asked Pendal’s Multi-Asset chief Michael Blayney for his view on different asset classes.

Many key equity markets remain overvalued despite the recent sell-off, says Michael. Rising bond yields are also weighing on equity valuation.

Michael likes good value markets such as the UK and Japan “and rotational themes such as value/small cap”.

High yield debt offers limited reward for risk though the recent increase in investment grade spreads mean decent returns on a medium-term basis.

Government bond yields now are better value, but bonds face a significant headwind from inflation.

The maturing cycle and event risks suggest a defensive risk stance, Michael says.

“Cash and alternatives with inflation linkage such as commodities and ‘value exposures’ are preferred.”

Michael Blayney: Three investing rules for turbulent times

Emotion can overwhelm strategy when markets are volatile. Pendal’s multi-asset chief Michael Blayney has three simple rules to remember in times like these:

1. Don’t Panic: A well thought-out and documented philosophy and process is crucial to any active decision making during volatility. This helps you stay disciplined despite the noise. It’s easy to get swayed by emotion, or worse still, enter a crisis at a risk level that wasn’t right for you to begin with.
2. Look for opportunities, but at least rebalance: Disciplined rebalancing adds to returns and reduces risk over time, compared to letting a portfolio run.
3. Diversification Matters: Diversified investors know there’s always going to be some part of their portfolio that’s not working as well as others. Then the cycle turns and they need that part of the portfolio. That cycle can take a decade so an investor must be able to cope emotionally with an underperforming asset for a period. Always include enough liquidity (cash) for your short-term needs. You never want to be a forced seller.