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 strange effect of the 30% minimum capital gains tax

The 30% minimum tax on capital gains sits at the heart of the budget's proposed reforms. Yet the mechanics reveal anomalies that introduce unexpected distortions that raise questions about its design.

Does your will qualify for the discretionary testamentary trust exemption?

Treasury has confirmed the exemption many families were hoping for. But buried in the fine print are two conditions that could leave some wills on the wrong side of the exemption, despite years of careful planning.

Ranking three common retirement strategies

The defining challenge of retirement isn't just about building wealth, it's about converting your lifetime savings into sustainable income. A holistic understanding of different strategies can improve long-term outcomes.

Are you making these SMSF mistakes?

After four decades advising investors, there are a few common mistakes I've seen SMSF investors make. From holding too much cash and chasing yield to overtrading and trusting tips. Are these errors costing you?

Why Australian shares are falling behind the world

Australia’s market boasts a long record of outperformance, but recent results tell a different story. Is the ASX’s lagging performance a temporary setback or evidence that structural forces will keep global markets ahead?

Australia has saved $4.5 trillion for retirement. Here's what matters more

Most Australians approaching retirement can tell you the exact dollar value of their super account. But success depends on more than a sizeable balance. Here's four key questions to ask yourself at the start of the financial year. 

Latest Updates

Economy

Why have Australian living standards 'fallen' and how do we fix it?

For the last few years there has been much talk of a 'cost-of-living' crisis in Australia and of 'falling living standards'. Lately this has flared up again with the pickup in inflation resulting in a renewed fall in real wages.

Latest from Morningstar

Four options for an income investor’s next dollar

What if Australia’s golden age of dividends is ending? Rather than overhaul your portfolio, it may be worth considering where new capital can work harder. I discuss four income strategies and the trade-offs behind each.

Taxation

Completing the reform of CGT: tax real losses like real gains

Recent CGT reforms tax real gains by indexing capital gains to inflation. However, the reform fails to index losses, leading to higher tax on assets that do not keep pace with inflation, creating inefficiencies in the tax system.

Investment strategies

Blockbuster AI debt issuance coming to a bond market near you

With Australia likely to attract a growing share of AI-related issuance, investors should prepare for increasing influence from AI funding demands, evolving credit fundamentals and changing valuation dynamics.

Investment strategies

Active managers: Bringing a gun to the gunfight

When data arrived, basketball abandoned the mid-range shot, Formula 1 reinvented the pit stop and chess embraced humans working with machines. Active managers confronting today's markets may learn from the same path.

Retirement

What Australian super funds can learn from the UK

Most people want answers to three retirement questions: What have I got? Is it enough? What can I do with it? A leading UK pension innovator shares his lessons on helping members better understand and prepare for retirement.

Investment strategies

What the market may be missing in FY27

We asked ten fund managers the same question following FY26. While their investment styles differ dramatically, their answers revealed several surprising areas of agreement about where markets may be heading next.

Sponsors

Alliances

© 2026 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.