With markets likely to remain in a lower-return, higher volatility mode for the remainder of 2013, Russell Investments is advising investors to use a multi-asset portfolio approach to mitigate the effects of short term shocks and uncertainty.
Addressing clients at the Russell Investments Australian Investment Summit in Sydney today, Russell’s Chief Market Strategist, North America, Dr Stephen Wood said investors would be constrained by what he called the “squeeze play” in the current low return environment.
“Given that only positive real returns build wealth, investors are going to be confronted by the question of where to invest in a yield-starved world? This “squeeze play” pushes people into riskier assets, as the need for yield squeezes them out of traditional safe haven assets – such as bonds – which are likely to lock in negative real returns. Investors needed to guard against a knee jerk reaction into riskier assets that jeopardise their long term returns, and adopt a strategically disciplined approach,” Dr Wood said.
Drawing on findings from Russell’s most recent Strategists’ Outlook and Barometer, Dr Wood said in the longer term, Russell was viewing equity markets more favourably than fixed income, citing the U.S. Federal Reserve’s (the Fed) stated policy position to leave rates at current low levels until 2015.
“The Fed has said it won’t consider raising interest rates until the unemployment rate falls to 6.5%. Our projections agree with the Fed that this is unlikely to happen until 2015. We believe this will continue to constrain bond yields over the coming year, and this will be further exacerbated by deflationary pressures, as well as instability in Europe, which will drive investors to perceived safe havens,” Dr Wood said.
In trying to avoid the “squeeze play”, Dr Wood said it was important portfolios contained exposures to differentiated sources of return.
“Actively managed, globally diversified, multi-asset portfolios are the best shot investors have at avoiding this “squeeze play” between negative returns and riskier assets. Set and forget is not a strategy that will provide investors with the returns they need in what’s shaping up to be a low return environment,” Dr Wood said.
Russell communicates the changing role of bonds in multi-asset portfolios to clients
Last week, Russell announced changes to the fixed income component of its multi-asset portfolios. The changes have been influenced by market trends and the expansionary monetary policies adopted by central banks around the world, which have brought down short and long term interest rates.
With nominal yields at historic lows and credit spreads becoming compressed in many markets, Russell informed clients it was adapting portfolios in order to access new, diversified sources of returns and reduce the risk of capital losses, in the event rates rise and expose investors to higher levels of interest rate risk.
The new fixed income strategies added to Russell’s multi-asset funds include absolute return bond strategies and exposure to local currency emerging market debt securities. Both strategies offer lower volatility, diversification from developed market interest rate risk and attractive return prospects.
Senior strategist, Asia-Pacific, Graham Harman said: “With so much uncertainty in markets, it’s critical portfolios are appropriately positioned to weather a range of scenarios, while still maintaining diversified exposure to different sources of return.
“While we are favouring equities over fixed interest in the longer term, we believe there is still an important role for fixed income in diversifying portfolios. The skill for investors is in selecting strategies that will provide different types of return drivers, mitigitate any risks emerging and take advantage of market opportunities.”