New world of investing demands change in attitude towards diversification, says Barings

News

Thursday, 03 September 2009 08:20

New research from Baring Asset Management (Barings) has highlighted the need for multi asset managers to be able to move swiftly in and out of asset classes. Barings’ research into the best and worst performing asset classes of the past four years (results shown in table below) demonstrates the volatility of major asset classes and highlights the need for managers to have the conviction to diversify as market conditions dictate and not be constrained by the tight ranges of traditional asset allocation models.

Andrew Cole, manager of the Baring Multi Asset Fund at Barings explains, ‘This data clearly demonstrates how volatile markets can be with the performance of some asset classes reversing over a very short period of time. For example, overseas bonds were the worst performing asset class for two consecutive years over 2005 and 2006, yet in 2008 they were the best performing asset class. Japanese equities were the second best performing asset class in 2005 but dropped to the second worst by the following year.

‘The aim of multi asset investing must be to capture returns when they are available and take risk off the table when the environment deteriorates. Since markets deliver returns unevenly through the business cycle, managers will be increasingly expected to tactically adapt the asset allocation and not simply follow fixed traditional asset allocation weightings. Within a multi-asset portfolio, the use of tactical asset allocation can lead to equity-like returns with less risk.’

2005		2006		2007		2008
Best performing
Emerging Equities	50.5	European Equities	19.7	Emerging Equities	37.4	Overseas Bonds	58.1
Japanese Equities	39.6	Property	18.1	Gold Bullion	29.6	Gold Bullion	42.8
Asia Ex Japan	35.0	UK Equities	16.8	Asia Ex Japan	29.0	UK Bonds	12.8
Gold Bullion	30.8	Emerging Equities	16.3	Europe Equities	15.3	Cash	4.7
Worst performing
Overseas Bonds	4.3	Overseas Bonds	-7.5	Japanese Equities	-6.5	Emerging Equities	-35.2
Cash	4.6	Japanese Equities	-7.4	Property	-5.5	Asia Ex Japan	-31.3
UK Bonds	7.9	UK Bonds	0.7	Corporate Bonds	1.8	UK Equities	-29.9
Corporate Bonds	8.7	Corporate Bonds	0.8	Hedge Funds	4.5	European Equities	-24.4

*Source: Barings. Figures above are for the asset class shown in sterling total return terms. As at 31/05/09.

Andrew continues, ‘Having recently experienced some real anomalies in the correlation between different asset classes, with almost all major asset classes going down in value, returns are now reverting to longer term norms. We will start to see more dispersed and varied returns from different assets and markets and it is our view that the days of maintaining exposure to all asset classes for the sake of diversification are over. We believe you will be rewarded for taking dynamic asset allocation decisions.’