As the positive correlation between bonds and equities is expected to recede in 2023, Pacific Asset Management (PAM) has added an allocation to inflation linked bonds within its multi-asset portfolios.
Giving the correlation headache investors faced last year with bonds and equites falling in tandem, Will Bartleet, chief investment officer and portfolio manager on the Pacific multi-asset team, said the portfolios allocations to alternatives and “diversifying assets” provided useful diversification benefits.
However, after 2022 proved the worst year for 60/40 portfolios since 1937, Bartleet said that the opportunity set has improved, with inflation adjusted (real) yields having repriced significantly.
“We have therefore added an allocation to inflation linked bonds, whilst remaining cautious on economically sensitive fixed income such as high yield,” he said.
Diversifying assets and alternatives
Given the expectation for market volatility to remain elevated, the team added allocations to diversifying assets and alternatives that have the scope to perform strongly in 2023.
The PAM team consider alternative assets to be commodities, gold as well as infrastructure, and listed commercial property.
“Many of these asset classes, including electricity generating infrastructure, performed well and were an important source of diversification for portfolios in 2022,” he said.
Diversifying assets exposure meanwhile comprises macro strategies, risk premia, and other strategies that are uncorrelated to equities and bonds.
“Strategies that utilised momentum were positive, as they capitalised on heightened macroeconomic volatility,” said Bartleet. “A strategy that takes advantage of the dislocation between value equities and growth equities performed strongly over the year, up nearly 25%.”
Meanwhile, despite expecting inflation to “cool” this year, Bartleet said longer-term inflation is likely to remain higher this decade than the previous two.
“History shows us that it can often take several years for inflation to normalise following shocks such as those seen post-Covid, and our view, given the valuation disparity in markets is that value strategies remain attractive,” he said.
“Given this, and the concentration of indices such as the US in growth focussed companies, we also believe that there are opportunities for active management to outperform in 2023,” he added.
