Hello and welcome to the Morningstar series,
"Why Should I Invest With You?" I'm Emma Wall
and I'm joined today by John Husselbee, Head
of Multi-Asset for Liontrust.
Hi, John.
Hi.
So, we're here today to talk about multi-asset,
which is your bag and talk about how asset
allocation is incredibly important in order
to achieve the aims that you have as an investor.
It's not as simple as choosing one fantastic
stock, one fantastic bond, one high-paying
cash account. It's the blend which really
can determine investment success, isn't it?
Most definitely. The blend determines success.
If you want to play defense against the market
or if you want to play attack against the
market, the long-term is the key and what
you have to work out is what each of those
asset classes, equities, bonds, alternatives,
and cash, what they are doing for you in your
portfolio and get the right blend as you said.
Let's take equities then for a starter. What
does equities add to a portfolio?
Well, equities are the main driver of growth
for your portfolio. So, over the long term
studies have said that equities outperform
bonds, outperform cash. So, equities are the
main driver of your portfolio. But there's
a price to pay for that and that price is
volatility and we see that more than once
or twice a year. So, equities are good for
the long term but the price you pay is volatility.
So, the blend is important and that blend
we call diversification, so using other asset
classes which act and behave in different
ways to try and smooth out that ride in equities.
So, you can invest 100% of your portfolio
in equities, but you've really got to think
about the long-term for that because it can
be a pretty bumpy ride.
The traditional sort of marry to equities
is of course bonds. What does bonds bring
to a portfolio?
Well, bonds provide traditionally, I should
say, because I think it is right – traditionally,
bonds have provided you with income, steady
income and they have also provided you with
price stability. Price stability in terms
of actually, as you said, being a good blend
with equities. So, when equities maybe rising,
bonds maybe falling and vice versa. So, it's
given you good diversification in your portfolio
and helped smooth out that bumpy ride that
I was referring to.
And it's not just about bonds and equities,
is it? You have some things such as cash for
liquidity and alternatives to provide an extra
sort of uncorrelated boost?
Yes, definitely. I mean, cash – so your
traditional asset classes in a portfolio,
equities, bonds and cash. So, equities drive
the performance, the long-term growth; bonds
give you income, price stability, some diversification;
and cash traditionally has been used for capital
preservation. So, if you feel that you want
to preserve some capital, normally you run
for a safe haven, that's typing being cash.
And as you said, alternatives have now become
quite popular. They've become quite popular
where we are in the investment cycle. That
is, we're in a low inflationary environment
but bonds are low as well. So, therefore going
forward, perhaps the job that bonds did in
the past, price stability in particular, may
not be able to do that in the future. So,
as you know, this industry never sits still.
There's innovation all the time and we've
got some new asset classes and funds in the
alternatives sector.
We might break them into two. So, you've got
alternative absolute return funds and then
you've got hedge funds. And if I just sort
of explain what my definition is because there
are plenty out there and I'm sure if you look
on the Internet, you'll find many definitions;
but for me, absolute return funds. These have
low correlation, in other words, they don't
act exactly the same as equities, bonds and
cash within the portfolio, have a low correlation
to the traditional asset classes, but they
look to reduce risk within your portfolio.
Whereas it comes to hedge funds, these things
still have low correlation, no correlation,
but they look to enhance your returns because
they are looking through different techniques
to get a different type of growth, a different
type of capital growth. So, alternatives are
becoming a growing part of client portfolios.
You touched on it there, portfolio construction
one-o-one suggests you have X percentage in
cash, X percentage in bonds, X percentage
in equities, but of course that assumes a
market that only goes one way and that is
up. We have had bond prices rising for over
a decade now and we are entering into quite
a different environment for bonds. So, how
much does the market backdrop determine what
one should hold in one's portfolio?
There are two key drivers of portfolio construction
when I'm looking at it. I've been running
money now for 30 years. The two key things
you've really got to keep an eye on is the
path of growth, global economic growth and
the path of inflation. That determines really
the construction of your portfolio.
In an inflationary environment it's a totally
different portfolio to one of a deflationary
environment. So, as you quite rightly said,
we've been in an environment for quite a long
time now, it's a bit of deflationary environment.
Inflation has been coming down. In that period
bonds have performed extremely well. Perhaps
as we turn around, I know there's not much
inflation around at the moment, but there
is a target of 2% for the Bank of England
and there's a target of 2% for most of the
central banks around the world. It rather
suggests that inflation will start coming
back. The way unemployment has fallen, I suggest
it's around the corner, whether it's in the
next year or so, inflation will start to come
back. So, therefore, you need to basically
be moving your portfolio around to reflect
that and that will probably mean at the moment
perhaps more equities and also perhaps more
alternative assets whether that's absolute
return funds or hedge funds. But avoiding
bonds to some extent, you still need bonds
in your portfolio.
I think one thing that perhaps sometimes people,
clients find it hard to understand is that
your portfolio you'll have equities, bonds,
alternatives in there and you look over a
period of time and yes, some of those investments
would have fallen and others would have gone
up. Sometimes it's actually best to look at
the whole portfolio rather than the individual
part. I think if you start looking at the
individual part, you start throwing things
out which actually have played an important
part within your portfolio to reduce volatility.
John, thank you very much. This is Emma Wall
for Morningstar. Thank you for watching.
