None of the ideas above are discussed purely on the view that inflation will get out of control. They all present the attractive growth and valuation characteristics we always strive to get access to, but the current inflation risk renders those strategies even more appealing.
Strategies to ride post-pandemic volatility
Inflation is not the only concern. As we move out of economic recovery mode, multi-asset investors face a more volatile outlook. As sentiment grows more fragile, the room for error is shrinking and investors could well lose their nerve as the year comes to an end.
History shows us that rebalancing portfolios is a superior strategy than trying to forecast market crashes. We believe there remain many areas of attractive value within global markets for active asset allocators. Moreover, any volatility could provide an opportunity to broaden exposure.
Against this uncertain backdrop, we highlight three more tactical allocation strategies that can help multi-asset investors safely plot a course through the post-recovery period.
With the current economic cycle advancing at a pace faster than many market participants anticipated, valuations may look stretched.
But this does not mean every investment opportunity is over priced at this time.
Equities tend to outperform in the early and middle stages of a recovery, but do less well as recoveries mature, typically marked by interest rates rising and volatility increasing.
In this environment, it is all about tactically shifting exposures or trimming positions to lock-in gains and unearth new opportunities.
One approach right now is to invest in areas that still show significant upside and look quite undervalued. At present, many market participants see those areas worth increasing exposure to as being funds or investment trusts that pursue the value style of investing, and as such have geographical exposure to Europe and the UK, as those markets tend to have substantially more stocks that fall into the value bucket than rival markets such as the US.
Make flexible use of cash
We are strong believers that multi-asset investors should make full use of the flexibility their broad mandates permit. As such, one approach is to increase cash levels in the fund when conditions begin to imply higher volatility levels, as this provides the capital to invest in assets that may fall in price. For example, our fund has tended to have an average of 2 per cent in cash over the past five years, but this varies depending on prevailing market conditions.
One of the key advantages of holding cash, particularly for active multi-asset investors, is that increased liquidity allows for opportunistic purchases when valuations decline to attractive levels and discounts widen for investment trusts. It is a means for us to stay on the front foot.
