Portfolio positioning

With the probability of a US recession having fallen since the start of the year, we’ve reviewed our tactical asset allocation.

Driving performance through tactical asset allocation

Producing suitable long-term strategic asset allocations (SAA) are the most important component when it comes to achieving the desired return objectives for clients. These are based on long-term 10-year return estimates, and so we also overlay a tactical asset allocation (TAA) to account for shorter-term market opportunities – the aim of which is to increase returns and/or reduce volatility. Typically, our TAA is based on a 6 to 18-month time horizon.

Markets exhibit periods of inefficiencies, and we aim to take advantage of these on behalf of our clients. Like many of our peers, we undertake our own market and macroeconomic research to help build views that drive our TAA positioning. To facilitate this, we utilise software tools such as Bloomberg and Factset to monitor and analyse financial market data.

Rigorous research driving informed decisions

In addition to our own research, being part of a global asset manager means we benefit from a couple of further inputs that help inform our views. The first of which is access to a range of high-quality external research providers, such as asset allocation and macroeconomic specialists. The second input is abrdn’s own dedicated research specialists in the form of the Global Macro Research and Asset Allocation & Research (AA&R) teams.  Having this overall depth and diversity of thought feeding into our TAA process is both unique and highly valuable. This breadth of research allows us to have an informed view on a diverse range of asset classes and manage portfolios at a more granular level – effectively giving us a larger toolkit when it comes to portfolio construction. For example, as shown in our current abrdn MPS 3 TAA below, we allocate to as many as 10 different fixed income sub asset classes.

Adapting to changing market conditions

Changes in our TAA positioning can be driven by a variety of factors – sometimes by a change in our overall outlook/sentiment, other times it can be more asset class specific. For example, as a team we came into this year concerned about a US recession, believing markets were under-pricing the risk of one. However, economic data has improved significantly since the turn of the year, with the US economy continuing to prove more resilient than we expected. This has seen the probability of a US recession fall and therefore we marginally increased equity risk in portfolios to reflect our evolved view that a ‘soft landing’ (i.e. a slowdown but avoiding a recession) is the most probable outcome. This was done by increasing US equities to neutral, whilst also adding to Europe ex UK equities but retaining a small underweight. We are neutral for all other regions, meaning we have a small underweight to equities overall, concentrated in Europe ex UK.

Current abrdn MPS TAA

Whilst we have increased risk by adding to equities, the portfolios overall remain defensively positioned by being overweight fixed income. Within fixed income we are overweight government bonds, allocating to the UK, US and broader global government bonds. We feel government bonds are attractive for multi-asset investors at the moment. Not only do they now offer meaningful income, but there is substantial capital upside if the US does slip into recession or some other event that triggers a flight to safety – the probability of the latter is not insignificant with heightened geopolitical risk across the globe at present.

Government bonds is an example of where we have made TAA changes that are more asset class specific over the past 18 months. In late 2022, after a substantial rise in bond yields, we initiated a US government bond overweight as the 10-year US bond yielded a material premium we felt was not warranted compared to the UK equivalent bond. By May of 2023 US government bonds had outperformed, now yielding materially less than the UK, and so we sold the US government bond overweight to increase UK government bonds that we felt now offered better value.

Where we are less positive within fixed income is global high yield – we are cautious about valuations (i.e. tightness of credit spreads), particularly with refinancing risks on the horizon. We implemented this underweight in October 2023, trimming global high yield to move overweight US and global government bonds.

To balance out our fixed income overweight, we are positioned underweight to absolute return strategies. Although we like the diversification properties of absolute return, particularly in a higher inflationary environment, we feel the risk/reward profile of fixed income is more attractive.

Listed infrastructure we like for many reasons. Not only is it cheap, but it can provide some inflation protection to portfolios if inflation surprises above expectations. Alternatively, listed infrastructure’s performance relative to equities also tends to correlate with changes in bond yields, which contributed to underperformance last year. If we see bond yields shift lower, this would be another environment we would expect the asset class to do well in.

abrdn Portfolio Solutions Limited offers a range of portfolio strategies for adviser firms, with a choice of management styles and risk levels to meet clients’ investment needs. To find out more, go here.

The value of investments can go down as well as up and your clients could get back less than they paid in.

The views expressed in this blog should not be regarded as financial advice.