JPMorgan Multi-Asset Growth & Income Trust plc (MATE) is designed very much as a core, one-stop shop for investors looking for expert hands to manage asset allocation as the economic environment changes over time.
To that end, manager Gareth Witcomb and the team of analysts supporting him have no constraints on exposure to any specific asset, leaving Witcomb free to allocate as appropriate across 40 countries and five asset classes.
He’s aiming to produce both a reliable quarterly income and capital growth, but with a third less volatility than would be baked into a traditional equity portfolio.
To do this, a starting ‘template’ portfolio of various types of bonds, equities, and alternatives is created, using a strategic asset allocation (SAA) based on long-term capital market assumptions.
To adjust for current macroeconomic conditions, active asset allocation is then brought in. As Wicomb stresses: “It’s important to understand that we expect to make meaningful asset allocation decisions around that starting point, based on the economic cycle.”
Although target returns are not guaranteed by any means, MATE’s portfolio currently has an expected total return above that of the target for the starting SAA portfolio. As Witcomb explains, that’s partly because of the volatility in asset classes in 2022, but it's also a reflection of active asset allocation.
In fact, there have been some significant adjustments to MATE’s portfolio over the past year or so.
With the rapid onset of inflation and consequent market mayhem in spring 2022, Witcomb became much more cautious on equities; developed market equities now stand at 45%, down from 53% in the starting portfolio1.
He also removed positions in convertible bonds and European small caps, marginally increased emerging market equities on an improving outlook for China and boosted global government bond exposure from 6% to a meaty 24%1.
Nonetheless, 2022 was pretty challenging for most multi-asset managers, and MATE was no exception.
As Witcomb explains: “We struggled to find traditional correlation benefits between most asset classes, as both equities and fixed income posted painfully sharp declines on the back of worries about inflation.”
It wasn’t entirely negative news for the portfolio. Infrastructure, which now accounts for around 13% of the portfolio, served MATE consistently well; and Witcomb had already been moving towards shorter duration government bond holdings from the end of 2021 as inflation showed signs of gaining pace.
But as he admits, the sharpness of the derating in fixed interest took pretty much everyone by surprise. “I don’t think the Fed expected at the start of 2022 that they would be delivering four 0.75% interest rate hikes in the middle of the year2.”
Similarly, although he had trimmed equity exposure at the end of 2021 and continued to do so during 2022, MATE’s equity holdings remained a drag on overall performance.
Looking ahead, there are some grounds for optimism. As Witcomb points out, the rolling three-month correlation between stocks and bonds, having been increasing until autumn last year, has finally seen a steep decline and is close to negative territory.
“That’s what we want to see,” he says. “It indicates that we’re looking at an environment where opportunities are opening up in parts of the universe that we look at.”
However, the nature of those opportunities is likely to be shaped by the global macroeconomic backdrop in coming months. So how is that likely to evolve?
Witcomb anticipates a worsening outlook for the US economy, with stress now trickling through into financial markets as a result of last year’s interest rate rises.
“Availability of credit, which is really the lifeblood of that economy, is going to become tighter, and that could be something of a headwind for growth,” he observes.
But it remains a highly uncertain picture. While the risk of a hard landing for the US has risen to around 30%, according to J.P. Morgan Asset Management’s May’s assessment, we believe inflation is trending downwards and might mean a relatively soft landing is still manageable.
The most likely scenario is still that growth remains resilient and inflation stays higher for longer. “Even under that scenario there are some asset classes that we think could perform quite well,” Witcomb adds.
Inflation was of course a core driver last year, and it remains a headache for policy makers and a central consideration in the team’s asset allocation decisions. While it is falling in core markets, it is set to stick above central bank targets in 2023.
Importantly, though, Witcomb believes central banks are close to the peak of their interest rate hikes – particularly given the unsettling impact of recent upsets in the banking system.
The upshot for the portfolio is that while he remains cautious, Witcomb is still seeing potential opportunities ahead. He points to investment grade credit, where he is “looking for widening spreads to lean into that market”, and also to equities.
“I shouldn’t be surprised if markets run and we reduce equity risk further in the next three months, but that gives us dry powder, ready to re-risk as the next economic cycle begins,” he says.
These are not easy times for investors, but it is reassuring to have the key decisions around how best to protect and grow your capital made for you by an experienced manager who can draw on global resources.
1 J.P. Morgan Asset Management, as at March 2023
2 US Federal Reserve, Open Market Operations, May 2023
Summary Risk Indicator
The Company has an objective of income generation and capital growth from a diversified multi-asset portfolio, while seeking to maintain lower levels of portfolio volatility than an equity portfolio.
Exchange rate changes may cause the value of underlying overseas investments to go down as well as up.
External factors may cause an entire asset class to decline in value. Prices and values of all shares or all bonds and income could decline at the same time, or fluctuate in response to the performance of individual companies and general market conditions.
This Company may utilise gearing (borrowing) which will exaggerate market movements both up and down.
The share price may trade at a discount to the Net Asset Value of the Company.
Investments in emerging markets may involve a higher element of risk due to political and economic instability and underdeveloped markets and systems. Shares may also be traded less frequently than those on established markets. This means that there may be difficulty in both buying and selling shares and individual share prices may be subject to short-term price fluctuations
This Company may use derivatives for investment purposes or for efficient portfolio management.
Dividend income is not guaranteed and will fluctuate.
This Company may invest in non-investment grade bonds which increases the capital risk and have an adverse effect on the performance of Companys which invest in them.
The Companys’ asset allocation is actively managed. This may increase the volatility experienced by shareholders and there is a risk that the performance of the Company will suffer if the allocation to any particular asset class is low when that asset class is outperforming or high when that asset class is underperforming.
Under exceptional market conditions the Company may be unable to meet the volatility level stated in the investment objective and the realised volatility may be greater than intended.
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