Keith Balmer, Senior Economist, Multi Asset team, Columbia Threadneedle Investments
1. How do you take a considered approach to portfolio positioning with the recent shifts in policy and macro trends?
Our portfolios are constructed specifically to take into consideration developments and trends that evolve over a variety of timeframes. We have three key processes to add value that are calibrated for different timeframes.
Our strategic asset allocation (SAA) process is designed to position the fund according to the market cycle. As such it is typically slow moving taking a longer-term view of developments in the markets. The allocations are, however, reviewed on a quarterly basis because, even though we are positioning the portfolio for the long term, there are events that can change the price of assets markedly over short-term periods. As the price you pay is a good determinant of the overall gain you eventually receive, it makes sense to react quickly to sudden large changes in price. A good example of this was in 2020. At our Q1 quarterly SAA review, high quality fixed income assets had become extremely expensive, with government bond yields almost at zero there was very little expected upside, whereas equities had become cheap. As such our long-term positioning was changed.
Coupled with the longer term, slower moving SAA process, we add a fast responding, more targeted Tactical Asset Allocation (TAA) process. This process takes into consideration the current macro-economic environment and well as changes in relative market pricing, frequently capitalising on non-fundamentally driven market movements. Recent examples of this would be Kwasi Kwarteng mini budget, Trump's Liberation day, US and UK election results, speculation around central bank interest rate policy etc.
The third process is stock selection, which has added considerable alpha to the portfolio since inception. We use investment teams across Columbia Threadneedle to run sub-advised mandates for Universal. The underlying teams add sector, factor, regional, credit quality and company tilts into the portfolio. For example, the global equity manager currently views most, but not all, of the Magnificent 7 to be overvalued, as such we are underweight this part of the equity market. The underlying managers are a mixture of systematically run, quantitative and fundamentally driven strategies which complement each other.
All three processes are run independently of each other which leads to uncorrelated alpha. This layer of diversification means we are not reliant on only one part of the process to do well. The combination of all three gives us the opportunity to deliver over the long term with sensible SAA allocations, and also respond to sharp dislocations in price through the TAA and stock selection processes.
2. How do you take advantage of shorter-term opportunities while preserving capital in challenging periods. How do you prioritize and add value?
The tactical asset allocation process is designed to capture shorter term opportunities. These opportunities can be where assets are underpriced and hence present a return potential or where assets are overpriced relative to their risk, in which case we would look to preserve client capital.
Tactical decision making is typically as a result of a prescribed fortnightly process. There is a regular meeting cycle which focuses on macroeconomic factors and valuations. These two meetings feed into our asset allocation meeting which pools all this information, as well as incorporating asset class specialist views from the wider investment talent at Columbia Threadneedle. Broadly we will try to form a view on each region and asset class looking through three different lenses: fundamentals, valuations and behavioural factors. By blending both quantitative and qualitative views in a structured format, we can build a good picture of where opportunities and risks lie. Of course, there are sometimes developments that occur at a faster pace than our meeting cycle, for example the pandemic in 2020 or Liberation Day earlier this year. In which case, we determine what is the most appropriate positioning to take, given the information that we have to hand.
Our tactical views are typically implemented through derivative contracts as they are cheap to trade and allow us to quickly get exposure into or out of the portfolio. A recent example of tactical trading was moving overweight to high yield following the Liberation Day tariffs and the subsequent significant widening of credit spreads, before recently closing out this position as spreads narrowed again.
Historically we have also used thematic trades where a strong top-down view has not been represented in the portfolios from a bottom-up perspective. A good example of this was increasing exposure to the value factor and decreasing the exposure to the growth factor in the portfolio in early 2022. Our equity factor exposure at a portfolio level is balanced between value and growth, however we had a strong view at the start of 2022 that there would be a rotation away from growth to value companies and so tactically changed our exposure accordingly.
3. Where are you currently finding value in multi asset?
Most assets are pretty richly valued compared to historic levels, with maybe the exception of government bonds. However, given our constructive view on the global economy, we think that there is further to go for equity markets and are currently overweight. Our largest regional overweight position is Emerging Markets (EM) and this is for several reasons. They have a large weighting to IT, but are not priced at such high multiples as you see on US technology names. EMs also tend to do well when the US dollar weakens, we are seeing more stimulative measures coming from the Chinese central party and the effects of tariffs on the region appear to be more muted than had been initially expected.
Credit markets briefly offered decent value as spreads widened following the Liberation Day tariff announcement. We took advantage of this within high yield, but have seen spreads tighten again back to their multi-decade lows and so have closed out our overweight position.
Within fixed income, government bonds offer a decent all-in yield and if central banks continue their rate cutting cycle we should see further reduction in yields, particularly at the front end of the curve. We believe that UK inflation has a good chance of surprising to the downside and this should lead to a reduction in yields further out on the curve. As such we have increased our UK government bond exposure versus our international government bond position.
4. Equites are a favoured asset class, what adjustment have you made this year in sectors or geographies? How do you reconcile value discipline with your positive equity stance when many argue valuations are stretched?
Within equities we started the year with a clear tactical preference to the US, on the expectation that a Trump presidency meant stimulus in the form of tax cuts, cutting red tape and a small amount of protectionism in the form of tariffs. It soon became apparent that this was not how Trump was going to play his first few months back in power. We subsequently cut the allocation to the US and increased exposure to Europe which should benefit from added stimulus from Germany and increased defence spending across the region.
Later in the year we became less convinced on the European outperformance trade and moved risk across to EM, which showed better upside potential and increased US exposure post the Liberation day devaluation. We have recently taken US exposure down, whilst remaining overweight, given valuations and used this risk budget to increase further our EM exposure. As we near the end of the year we hold overweight positions to EM and the US and small partially offsetting underweight positions to Japan, UK and Europe.
The US remains fundamentally the strongest global economy which, when combined with the quality of companies and their associated earnings growth, makes it an attractive region. The high valuation levels of US companies mean that the size of this overweight is tempered. EM gives us a cheaper way to play the AI trade given the region's exposure to technology, which amongst other reasons, is the reason it is our preferred market.
5. What are your performance drivers this year and how much of your outperformance this year comes from asset allocation versus security selection versus timing?
The strategic asset allocation positions continue to drive the majority of returns with good contributions coming from the "risk on" asset classes. Recently our tactical trading has added decent returns, moving into high yield post Liberation Day. The overweight position to US and EM has also contributed positively to returns. Stock selection from our equity managers has been a little more challenged in recent months, however the fixed income teams have done very well this year delivering good benchmark-beating returns across credit and government bonds
6. An index dominated by a few large stocks can make it difficult for active managers to demonstrate the value of their approach if they are not exposed to those stocks, even if their other stock picks are sound. How do you consistently generate alpha?
Narrow equity markets narrow dominated by a small number of companies are not ideal situations for most investors, active or passive (good for passive investors as the big companies get bigger but bad when corrections occur). This is especially true when valuations are running high and this small cohort of dominant names are at the expensive end of the range. However, investing is never easy, and so it is important to have a robust strategy in place to capture opportunities wherever they arise.
In part, due to these valuations, the global equity strategy that we invest into has been underweight in aggregate the Magnificent 7 for a few years now. Despite this the strategy has outperformed their global equity benchmark over this period. It has been able to find opportunities in other parts of the market than just the AI hyperscalers. The strategy targets a relatively tight tracking error of around 2-3%, with maximum active position sizing of +/- 1%. Despite these constraints the strategy has delivered outperformance of more than 2% since the inception of the Universal range.
By maintaining a balanced exposure to value, growth and quality factors it has allowed them to outperform in big growth factor driven markets such as 2023 and 2024, as well as delivering outperformance in 2022 when markets rotated out of growth and into value.
7. With relative expectations improving for non-US stocks and the growth drivers within US equities broadening out, the active opportunities for investors are expanding, does this indicate a new era for active management?
Looking back over the macro-economic market conditions that Universal has traded through over the past 8 years – two recessions across most global regions, one global pandemic, several wars, double digit inflation in the Western world, negative interest rate policy followed by the fastest interest rate hikes in a calendar year and that is without mentioning the significant political that we have seen in the US, UK, France and Japan - I would say that there has been significant opportunities for active managed to demonstrate its benefits and the Universal range has delivered accordingly.
There will always be undercurrents at a micro economic level as well and our underlying investment teams have demonstrated their ability to adapt and deliver at an individual stock and bond level as well. We are currently living through an AI dominated equity market, which, as with all new technological advances, has led to a small cohort of winners. However, when looking back through history we see that new themes and trends emerge and yesterday's winners turn into tomorrow's losers. So, I don't think that this indicates a new era for active management, I don't think it was ever a bad era for active management. The difference with The CT Universal MAP range is that we only charge 0.29% capped OCF and so the underlying investor gets the majority of the benefit.
