Liontrust is in the process of shifting its multi-asset funds to focus on areas where it feels active management can add most value.
In light of recent market volatility and the indiscriminate sell-off in growth, quality and small-cap stocks, John Husselbee, head of multi-asset at Liontrust, said this is an environment that should favour active management in UK and Europe.
The team is, therefore, currently moving its MA Blended funds towards an overall 70/30 split in preference of active over passive funds in its UK and European fund selection.
“Given the fact so many growth companies have sold off in recent months, we can take the opportunity to increase quality and growth exposure across the funds at attractive valuations,” he said.
“We expect this rebalancing to enhance performance over the long term but it will take time to finish off this work,” he added.
Sign of the times
After over a decade of growth ascendancy, Husselbee said the value rotation is an early sign that the backdrop may be changing, while he added the ongoing uncertainty around inflation and interest rate rises support the team’s view that returns from stock markets, in particular the US, will be lower this year.
“Higher interest rates typically present a more difficult backdrop for long-duration growth companies and if we are set to be in a hiking cycle for a couple of years or longer, we would suggest the environment for value could be favourable,” he said.
“That said, recent selling has left many growth companies on more attractive valuations and we would expect to top up our weighting over the coming months,” he added.
“We maintain that multi-asset portfolios able to tilt between growth and value, while keeping a foot in both camps, offer the optimal risk/reward balance.”
Performance
Looking at performance year-to-date, Husselbee conceded that holdings in mid and small caps, in addition to a large weighting to UK gilts, have proved major detractors to performance.
“For our multi-asset funds, in particular, the current strategic asset allocation (SAA) has a large weighting to UK gilts, which have struggled as the Bank of England was first to hike rates and yields spiked as a result,” he said.
“Over the first quarter of 2022, UK gilts underperformed global bonds by around 3%, which has had a considerable impact on our performance relative to peers, especially for the lower- and mid-risk funds,” he added.
Beyond gilts, Husselbee said the main drags on performance have been allocations to ‘quality’ managers, whose stocks have been sold alongside growth names, as well as its allocation to mid and small caps, which have come under pressure amid recent selling.
“We see our allocation to mid and small caps as a key differentiator versus passive peers, which tend to take a market-cap weighted approach to equities,” he said. “However while we are confident it will add value longer term, this has clearly been a recent detractor.”
Inflation hedging
While maintaining the view that inflation will fall, Husselbee did recently add the Liontrust Diversified Real Assets fund across several of his portfolios.
“We believe real assets should provide a differentiated return and income profile and, importantly, given the backdrop an element of inflation hedging,” he explained.
“We continue to hold a blend of asset classes and styles rather than relying on any one portfolio element and believe this will help us deliver on suitability over the long term,” he added.
