The fast view
- Valuations of many asset classes – at a broad level – look elevated and we expect markets to be more volatile and at risk of sharp drawdowns.
- We believe bonds may face the headwind of rising yields for years, not just months, leaving them ill-equipped to reliably offset periods of equity market weakness.
- The global backdrop is likely to be challenging for single asset solutions, as well as traditional balanced strategies, which tend to run with the market and rely on bonds for diversification.
- We are confident that the Ninety One Global Multi-Asset Income Fund remains well placed to deliver defensive returns, particularly given that the fund has demonstrated its mettle during difficult periods for bond markets.
- The fund has a strong long-term track record of positive total returns, driven by resilient income, with ‘bond-like’ volatility.
Last year marked the eighth consecutive calendar year of positive total returns since inception for the Ninety One Global Multi-Asset Income Fund. This demonstrates the ability of the fund to consistently meet its objectives of delivering defensive total returns, driven by resilient income, with ‘bond-like’ volatility (less than half that of global equities).
Protection in turbulent markets
The Ninety One Global Multi-Asset Income Fund is typically used by investors as a defensive diversifier within the broader context of a portfolio, either as an alternative to absolute return strategies, or increasingly as an alternative to traditional defensive fixed income exposure. Therefore, it is important that the fund offers protection in turbulent markets while delivering a defensive total return over time. The fund has shown its ability to navigate diverse market conditions: protecting against drawdowns (2015/16, 2018, H1 2020); capturing upside in rising markets (2014, 2017, 2019, H2 2020); and demonstrating robustness in a year where our resilient income-driven style of investing was out of favour (2021), as shown in Figure 1.
Figure 1: Peak to trough performance during drawdown episodes
Past performance is not a reliable indicator of future results, losses may be made.
Calendar year returns for the fund; 2021: 0.5%; 2020: 5.0%; 2019: 6.2%; 2018: 0.5%; 2017: 6.0%; 2016: 4.4%. Source: Morningstar, 31 December 2021. Period shown is since 30 September 2013, from inception of the A Acc share class. Performance is net of fees (NAV based, including ongoing charges, excluding initial charges), gross income reinvested, USD. The MSCI ACWI Index is included to illustrate prevailing market conditions/events since inception of the fund. The fund is actively managed. Any index is shown for illustrative purposes only. Highest and lowest returns achieved during a rolling 12-month period since inception: March 21: 13.8% and March 20: -4.6%.
Investment styles inevitably go in and out of favour. For example, in 2018 our investment style helped us to deliver outperformance, whereas we saw the reverse in 2021. Despite these recent stylistic headwinds, the Ninety One Global Multi Asset Income Fund performed favourably versus defensive alternatives such as high-quality bonds, as can be seen in Figure 2.
Figure 2: Year-to-date total returns: Ninety One Global Multi-Asset Income Fund vs. Global Aggregate
Past performance is not a reliable indicator of future results, losses may be made.
Source: Ninety One, Bloomberg 31 December 2021. Performance is net of fees (NAV based, including ongoing charges, excluding initial charges), gross income reinvested, in USD. BBgBarc Global Agg and MSCI ACWI indices are not the benchmark of the fund and the chart above is solely for information purpose and should not be relied upon. Fund inception: 31 May 2013.
Expect more volatile markets and a difficult period for bonds
We are confident that our strategy and style remain the best way to deliver defensive returns, particularly given the fund’s ability to navigate difficult periods for bond markets. We believe this will come to the fore in 2022, given the likelihood of higher interest rates and shrinking balance sheet support for US Treasuries.
Strong consumer and company balance sheets should underpin solid economic activity this year, supporting equity earnings. However, we are transitioning from a post-pandemic recovery to a mid-cycle expansion. We are beginning to see the withdrawal of central bank monetary policy support, and there is the potential for inflation to remain problematic. This, against a backdrop where valuations of many asset classes – at a broad level – look elevated. While we expect growth to be well underpinned in 2022, markets will likely be more volatile and at risk of sharp drawdowns. As policy support is removed, we believe bonds may face the headwind of rising yields for years, not just months, leaving them ill-equipped to reliably offset periods of equity market weakness.
To some extent the one-way bull market for much of the last 18 months has been unusual. After the Global Financial Crisis, markets have been inherently more vulnerable to large drawdowns due to an unstable balance between competing forces (weak economic growth versus extreme policies, such as low/negative real interest rates and central bank bond buying). These moves have been exacerbated by less market depth and more crowding in markets, driven by the growth of passive investing (Figure 3).
Figure 3: Protecting the downside is critical but harder to do
Drawdown of an equally weighted bond/equity portfolio
Source: Ninety One, Bloomberg, 31 December 2021 (maximum data set available).
A challenging backdrop for single asset solutions and traditional balanced funds
We expect this volatile and episodic nature to continue to be a key feature of markets; we saw signs of its return in the final weeks of 2021 and at the start of 2022. This backdrop is likely to be challenging for single asset solutions, as well as traditional balanced strategies and other multi-asset funds, which tend to run with the market and rely on bonds for diversification.
Conversely, we believe we are well placed to navigate the environment ahead:
- Our equity investment style is well priced following a period of relative underperformance for resilient yielding equities, presenting an attractive valuation opportunity versus the broader market. In addition, as we move into a more uncertain environment, we believe our focus on income resilience will help to underpin returns.
- A bottom-up approach means we can continue to identify significant opportunities even when valuations at an asset class level look stretched.
- Volatile markets give us opportunities to manage risk – capturing upside and protecting on the downside, particularly as we do not rely on duration for defence.
Portfolio positioning – benefiting from maximum flexibility and choice
Overall, our search for resilient income from within a very broad global security universe creates maximum flexibility and choice, together with the ability to manage risk. The fund’s current positioning is consistent with the more cautious near-term outlook outlined earlier. For example, we have hedged a portion of our equity exposure but have the ability to redeploy this ‘dry powder’ should market weakness abate. Overall duration also remains low at just 1.0yr, reflecting the likelihood that less policy support will tend to push currently very depressed real bond yields higher. As such, our sensitivity to rising interest rates is minimised and we do not need to rely on duration for defence. Instead, options provide an attractive and flexible way to hedge some of these risks, while retaining the potential to capture market upside.
In spite of cautious positioning at a portfolio level, our focus on attractively valued individual securities with resilient income and the potential for long-term capital growth means we continue to find compelling opportunities. For example, within equities there is significant scope for dividends to grow as the global economy rebounds, which should support the performance of higher yielding equities, especially those that are underpinned by strong cash-flow generation. In addition, following a period where the dividend style has been out of favour, with the market focused either on the high-growth or deep-value styles, there remains a meaningful recovery potential in valuations for the income style.
We see exciting opportunities among several asset classes outside of equities. Within fixed income, selective developed and emerging market bond markets have begun to extrapolate higher inflation and interest rates, beyond levels which look likely, and offer more resilient fixed-income exposure than lower yielding US, EU and Japanese government bonds. Our exposure in these markets remains in shorter dated maturities, with most currency risk hedged back to US dollars. As such, we are able to access the generous risk premia they currently offer in a prudent manner.
Even though elements of our strategy were tested last year, the Ninety One Global Multi-Asset Income Fund delivered a positive total return. Our approach has delivered on its mandate over the life of the fund, and we are confident that a focus on resilient income remains the most reliable way to achieve a consistent defensive return. We expect security selection, looking for well-priced dependable income, to drive the portfolio’s future return generation. Diversification and risk management will help us to navigate the volatile markets that we anticipate in the years ahead.
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