Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 182

Managing dynamic asset allocation in unusual times

  •   17 November 2016
  • 1
  •      
  •   

The dreamers need the realists to keep them from soaring too close to the sun. And the realists? Well ... without the dreamers, they might never get off the ground.” - Modern Family

What better way to describe the importance of diversity of opinion? For a healthy functioning society, the existence of both dreamers and realists is critical. So too in markets. Disagreement, bulls and bears play a critical role in market stability. The problem arises when the balance is tipped too much in either direction or when disagreement is replaced with group think.

Taking the good with the bad

Consider 2006/2007’s extreme in greed versus the recent years’ extreme in aversion. Too many dreamers and no realists saw markets soaring too close to the sun. Having been burnt badly following the GFC, global growth still can’t get off the ground. It feels like a low-flying plane that constantly hits air pockets causing both occasional lifts and near-death experiences.

This is good and bad. It’s good because blind optimism hasn’t led to economic excesses and greed that tend to end in disasters. But it’s also bad, because there is little conviction in investing for the future at both corporate and household levels.

Still, good and bad is not necessarily unwelcome when it comes to investment opportunities. The divergence in investor opinion and the general lack of conviction in economic growth is leading to many opportunities as well as risks, and a world of extreme divergences.

At the heated extreme (not too far from the sun) is anything yield related, while down near the ground is anything risk related. The rationale is clear: the world is a mess, central banks are out of ammunition, the population is aging and judging by the experience of the past few years, growth will continue to disappoint for many years to come. It’s hard to argue with that logic and we don’t intend to. Our investment philosophy is built on scepticism. The sceptic in us says “when it is so obvious, it’s obviously wrong”.

And that must be what Mark Twain had in mind when he said: “It ain’t what you don’t know that gets you in trouble. It’s what you know for sure that just ain’t so.”

What’s certain?

So what does the market know for sure? That inflation will never come back, growth is as good as it will get and interest rates will remain near zero for many years to come. The polar extreme in relative performance and relative valuation of the low volatility theme (for example yield and defensive growth) versus the risk theme (for example value and cyclical growth) and the fact that more than 40% of the global sovereign bond index has a negative yield reflects the perceived ’no growth, no inflation forever’ backdrop.

In fact, much of the market appears crowded away from risk and value and into quality and low volatility.

Irrational investment behaviour

The search for yield started as a perfectly valid strategy following the GFC. But by now, a theme that was anchored around perfectly rational investment logic has morphed into irrational investment behaviour (when shares are bought for income and bonds are bought for capital gain).

The chase for yield, low volatility and quality has now become a crowded momentum trade. The self-fulfilling cycle of money pouring into low volatility and quality stocks leading to strong price gains, further supressing volatility, encouraging more flows and price gains has led to a false sense of security and confidence in making easy money. Our inner sceptic tells us it can’t be that easy. The momentum spring can’t stretch forever. Eventually it will snap or it will spring back.

Here’s why: five years of fiscal austerity is giving way to fiscal neutrality, and while important risks persist and need ongoing assessment, there are signs that 2017 could mark a return to a more synchronised global economy, at least in US dollar terms.

The stability in the US dollar, improving commodities performance and rebounding inflation expectations all point to an unfolding regime shift. If so, the recent back up in sovereign bond yields has further to go. This poses both risks and opportunities.

Subsequently, this is how we’re managing our dynamic asset allocation funds:

  • To manage downside risk where diversification is extremely hard to achieve, we are increasingly using option strategies.
  • We’re staying away from low interest rate/low inflation winners of the past few years such as nominal bonds and bond proxy equity sectors.
  • We have a diversified exposure to low interest rate/low inflation divergence theme such as commodities, global banks, Japanese shares, emerging market equities, and currencies.
  • We have higher cash holdings as a defensive buffer.

Bottom line

The world’s glut of savings has now ended back in the US where it started, this time in low volatility, defensive, quality themes. These themes are expensive, over-owned, over-loved and vulnerable (ticking all the boxes for ‘avoid’ under our investment process). Still, we doubt any unwinding will be disorderly as central banks remain friendly, real yields remain negative (despite rising nominal yields), and global growth is showing signs of broadening.

 

Nader Naeimi is Head of Dynamic Markets at AMP Capital. This article is a general view and does not address the specific circumstances of any investor.

 

  •   17 November 2016
  • 1
  •      
  •   
banner

Most viewed in recent weeks

The growing debt burden of retiring Australians

More Australians are retiring with larger mortgages and less super. This paper explores how unlocking housing wealth can help ease the nation’s growing retirement cashflow crunch.

Four best-ever charts for every adviser and investor

In any year since 1875, if you'd invested in the ASX, turned away and come back eight years later, your average return would be 120% with no negative periods. It's just one of the must-have stats that all investors should know.

LICs vs ETFs – which perform best?

With investor sentiment shifting and ETFs surging ahead, we pit Australia’s biggest LICs against their ETF rivals to see which delivers better returns over the short and long term. The results are revealing.

Family trusts: Are they still worth it?

Family trusts remain a core structure for wealth management, but rising ATO scrutiny and complex compliance raise questions about their ongoing value. Are the benefits still worth the administrative burden?

13 ways to save money on your tax - legally

Thoughtful tax planning is a cornerstone of successful investing. This highlights 13 legal ways that you can reduce tax, preserve capital, and enhance long-term wealth across super, property, and shares.

Warren Buffett's final lesson

I’ve long seen Buffett as a flawed genius: a great investor though a man with shortcomings. With his final letter to Berkshire shareholders, I reflect on how my views of Buffett have changed and the legacy he leaves.

Latest Updates

Retirement

Why it’s time to ditch the retirement journey

Retirement isn’t a clean financial arc. Income shocks, health costs and family pressures hit at random, exposing the limits of age-based planning and the myth of a predictable “retirement journey".

Financial planning

How much does it really cost to raise a child?

With fertility rates at a record low, many say young people aren’t having kids because they’re too expensive. Turns out, it’s not that simple and there are likely other factors at play.

Exchange traded products

Passive ETF investors may be in for a rude shock

Passive ETFs have become wildly popular just as markets, especially the US, reach extreme valuations. For long-term investors, these ETFs make sense, though if you're investing in them to chase performance, look out below.

Shares

Bank reporting season scorecard November 2025

The Big Four banks shrugged off doomsayers with their recent results, posting low loan losses, solid margins, and rising dividends. It underscores their resilience, but lofty valuations mean it’s time to be selective. 

Investment strategies

The real winners from the AI rush

AI is booming, but like the 19th-century gold rush, the real profits may go to those supplying the tools and energy, not the companies at the centre of the rush.

Economy

Why economic forecasts are rarely right (but we still need them)

Economic experts, including the RBA, get plenty of forecasts wrong, but that doesn't make such forecasts worthless. The key isn't to predict perfectly – it's to understand the range of possibilities and plan accordingly.

Strategy

13 reflections on wealth and philanthropy

Wealth keeps growing, yet few ask “how much is enough?” or what their kids truly need. After 23 years in philanthropy, I’ve seen how unexamined wealth can limit impact, and why Australia needs a stronger giving culture.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.