Multi-asset: How to manage portfolios when the world’s in turmoil

Beyond the human tragedy in many parts of the world, investors must be ready to manage assets differently in times of geopolitical uncertainty. Here are some tips from Pendal’s multi-asset chief MICHAEL BLAYNEY

• Prepare ahead of time and understand your assets
• Consider a greater home bias
• Browse all Pendal’s multi-asset funds

IT CAN be hard to focus on the health of our investments knowing that many people are struggling for survival in war zones around the world.

Just reading the newspaper or watching TV news reports about Gaza or Ukraine is enough to make most Australians feel extremely fortunate.

Yet amid the global geopolitical uncertainty, our portfolio management responsibilities remain.

How does one consider the impact of geopolitical risk on portfolios?

In this article, Pendal’s head of multi asset Michael Blayney offers some tips for managing investments in times of global turmoil:

Prepare ahead of time

Preparing for geopolitical turmoil starts before geopolitical turmoil happens, points out Blayney.

“World events are unpredictable. We have no idea what could happen with China and Taiwan, for example.

“As investors, we need to live with these risks and think ahead of time: ‘how well diversified am I? where are my assets?’

“The first thing is to start with a well-diversified portfolio that’s consistent with your risk tolerance – a good blend of equities and bonds and some alternative assets.

“The last thing you want is something bad happens and then you realise you’re invested in a way that is outside your risk tolerance.”

Understand your assets and exposures

Understand your assets and where you are exposed before an event happens, says Blayney.

“When these events happen, you often see investors rushing to ask their fund managers where their assets are invested and how much exposure they have.

“It’s useful to know before the event where you have a lot of exposure.

“For example, if your bond portfolio is heavily exposed to some emerging markets, you might find it’s not as defensive as you thought it would be coming into one of these events.”

As an example, Blayney points to Bloomberg’s Global Aggregate Bond Index, which serves as a global benchmark for measuring the relative performance of fixed-income investments.

“If you use the Global Aggregate Index – which a lot of people do – you can find yourself with up to almost 10 per cent  of your bonds invested in Chinese bonds.

“In the event of a major blow-up around Taiwan, you might find the bond portfolio you’re holding for defence is nowhere near as defensive as you’re expecting it to be.

“It’s important to be aware of what’s under the hood.”

Consider some home bias

Once you have a strong understanding of your assets and exposures, you’re better placed to understand your comfort level, points out Blayney.

If you’re watching the TV news and finding you’re not feeling comfortable with the amount of geopolitical uncertainty, consider a bit more “home bias”, says Blayney.

“International diversification has lots of benefits. But this environment may support a bit more Australian equities and a bit more exposure to Aussie bonds.”

Blayney has rebalanced Pendal’s asset allocation towards home in recent times. You can read more about the team’s reasoning here.

“We’ve now got 27% exposure to Australian shares and 34 per cent to global shares in our sustainable balanced fund,” he says.

The local stock market offers Australian investors benefits such as franking credits and a stable dividend yield.

“We also benefit from that ‘friendshoring’ theme (where governments push businesses to restructure supply chains and production away from geopolitical rivals to friendly powers).

“Plus if you have any valuation concerns over the Magnificent Seven tech stocks – and the impact that has on the valuations of global shares – Australia can be a good place to be.

“That’s not to say we’re giving up on global. But at the margin when reviewing our strategic asset allocation – and increasing equity exposure – we have been increasing Aussie rather than global.

The same goes for Aussie bonds.

“I think you’d apply that almost doubly to bonds, where Australia does have that safe haven affect. US government bonds are generally also a good place to be if things go badly.“

Other safe-haven options

Besides a home bias, investors looking for greater comfort might also consider a greater allocation to defensive assets.

“The best way to think about defence is nothing ever works perfectly,” says Blayney. “You want to have a few different strategies.

“Bonds are a good hedge against economic weakness. They benefit from a flight to quality if something really bad happens in the world.

“But they won’t work as well when you get inflation shock, as we saw in 2022.

“It also makes sense to have some cash. For one thing you don’t want to have to dip into market-linked investments to pay for your living expenses.

“And it does give you that dry powder to buy.”

Beyond cash and bonds, assets such as foreign currency and alternatives can be useful defensives assets, says Blayney.

Don’t over-react

Investors typically focus on the first-order effects of a geopolitical event.

But it’s also important to think about what the second-order effects might be, points out Blayney.

“In 2022 when Russia invaded Ukraine, most of the damage done to people’s portfolios had little to do with their direct exposure to Russia.

“You had the interest rate cycle and inflation fueled by the geopolitical events.

“Israel’s invasion of Gaza was a terrible human tragedy on both sides of that conflict. But it hasn’t moved markets to any great degree.”

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