Q&A with Alain Zeitouni, Director, Head of Multi-Asset, EMEA
The Russell Investments Multi-Asset team have navigated the uncertainty of the last 18 months with confidence, adapting the portfolios when needed with a focus on the long-term. Here, we speak to Alain Zeitouni, Director, Head of Multi-Asset, EMEA. Zeitouni joined Russell Investments 10 years ago, and in October 2020 became Head of Multi-Asset.
Having successfully navigated through challenging market conditions and driving strong performance in the Russell Investments Multi-Asset Growth Funds since starting his new role in October 2020, we discuss the benefits of a multi-asset strategy and the opportunities over the next three years in this Q&A.
1. Can you talk about the current inflationary environment and how it may impact investors?
Inflation is the persistent rise in the average cost of goods and services over time, decreasing the purchasing power of your pound or euro. It’s important to note that a little bit of inflation is positive, as it shows that the economy is growing – prices of products or services usually rise due to increased demand.
Recently, we’ve experienced inflation at the highest level since 2008. Inflation has risen significantly, most notably in the U.S. but also across Europe. When prices rise that notably, central banks must intervene. One of the ways they do this is by raising interest rates, ensuring the pace of inflation is steady. Higher rates have varying impact on different assets. When inflation rises due to an overheating economy, interest rates often do as well. This then impacts fixed income assets – mostly government and corporate bonds which pay fixed interest rates – which is why inflation is an important parameter that we consider.
Despite the concern associated with the rapid rise in inflation, we believe that this time inflation is transitory and short-term. This is due to the historic recovery we have witnessed in global economies, some of the disruptions to supply chains due to the pandemic and accelerating consumer spending. All of these parameters should normalise within the next 6 to 12 months, as post-pandemic side effects disappear.
In terms of how inflation has impacted our portfolios, it is fair to say that our fund’s positioning benefitted from the rise in inflation expectations. Concerns around accelerated inflation started in late Q4 2020, with the prospects of a rapid economic recovery due to the wide availability of vaccines and the historic fiscal stimulus available. We had an overweight to global real estate securities in our portfolios which, as expected, has performed very well in this scenario given the long-term nature of their business model and therefore, the lower sensitivity to short-term rise in prices. We also added gold to our portfolio, which historically performs well in a reflationary environment and can provide protection during this period.
2. What were the main contributors to performance over the past 12 months? Did you make any changes to the strategy?
Our global investment strategy is based on our cycle, value and sentiment (CVS) process. Last year, our analysis indicated that the cycle was very strong, with accommodative fiscal and monetary policy support from governments and central banks. Corporates have shown a strong ability to adapt and have delivered very robust corporate earnings. This dictated our overweight positioning in equities in the Russell Investments ICVC funds, which has been the strongest performance contributor over the past 12 months. In fact, from the end of July 2020 to the end of July 2021, global equity markets (measured by the MSCI World in GBP terms) have increased by 25.5%, excluding dividends). Given that over this period, our portfolios were overweight in equities - this generated a significant performance contribution.
Within our equity book, our exposure to small cap companies performed well – outperforming large caps, due to the more cyclical positioning and recovery that we have seen.
Another point to mention is our currency positioning. Over the last 12 months, we have increased our non-sterling exposure within the portfolios. In fact, the UK economy was particularly impacted by the pandemic due to its exposure to global trade and its cyclical nature, therefore sterling had been significantly under pressure in Q1 2020 when the pandemic reached us.
We decided to reduce our non-GBP exposure in Q3 and Q4 2020, as we expected that the UK should recover sooner than other economies and that a Brexit deal with the EU should reduce short-term uncertainties. Having a high level of sterling in our portfolios proved to be relevant, sterling appreciated from 1.16 to 1.36 against the U.S dollar from March 2020 to December 2020. We took some profits and reduced this sterling exposure, as the currency reached what we thought was its fair value in late Q4 2020.
Additionally, we were already short duration versus our benchmark, which helped in Q1 2021 when the fears of higher inflation created a selloff in fixed income markets.
3. What are some of the biggest challenges you and the team have faced over the past 18 months?
Over the past 18 months, we have witnessed the fastest recovery in equity markets in history, following the deepest economic recession since World War II. If we take a step back, 12 months ago we were in a market environment where a handful of stocks (the FAANG stocks) had contributed to more than 50% of the overall performance of the S&P500 index. This had in turn driven the outperformance of the U.S. markets, compared to the rest of the world. This narrow lead in performance was not favourable to our portfolios, which are geographically diversified and carried an underweight position to mega cap growth-oriented stocks (such as the U.S. technology sector). Our valuation indicators were telling us that this was unsustainable, given the magnitude of the valuation gap and that the biggest opportunities were outside this segment. But, despite this fundamental opportunity, U.S. tech continued to outperform, as the pandemic meant a shift in consumer and working patterns, which was beneficial to technology stocks.
We, therefore, faced a huge challenge with this strategy not playing out, up until vaccines were announced in late 2020. However, in November 2020, we saw a significant rotation from growth to value and from U.S. to non-U.S. stocks. Whilst the period prior to the recovery was somehow challenging, our tilt towards value and non-U.S. stocks did bode well for the portfolio at the end of 2020 and the beginning of 2021.
4. Why do you believe investors should consider investing in a multi-asset fund?
One of the most significant benefits of a multi-asset fund is the diversification it offers. Diversification works because different types of investments often don’t perform in the same way at the same time, enabling you to spread risk and improve the potential for returns.
Diversification is also a great tool to smooth out portfolios returns and lessen the effects of short-term market volatility. By investing in a wide range of asset classes, you can potentially achieve less volatile returns than those that might come from investing in just a lone asset class, like equities, for example.
If history prevails, the difference between the best and worst-performing asset classes is substantial and the winners of the current year might not be the winners of future years. If you invest in just one type of asset – such as UK equities – you may be exposed to a greater level of risk. If the stock market fell suddenly, the value of your shares would substantially fall in value. A well-diversified portfolio spreads this risk by holding other investments that aren’t correlated to shares – such as FX or government and corporate bonds. In other words, multi-asset investing means not putting all your eggs in one basket.
As well as being a multi-asset fund, our Russell Investments ICVC funds are hybrid portfolios: They combine an active multi-manager approach and passive exposures to the most efficient asset classes. This is a unique feature of our fund range, allowing you to enhance diversification and bring more flexibility. The active multi-manager approach offers access to highly skilled specialist managers who can harvest financial market opportunities. Having passive exposure allows us to keep costs under control and to be more flexible within our tactical asset allocation process. When you invest into one of the Russell Investments ICVC multi-asset funds, you have access to a magnitude of asset classes and different managers – providing unique diversification and access to our highest ranked managers.
5. Where do you see the greatest opportunities over the next three years?
As mentioned earlier, our investment process is driven by three components: cycle, valuation and sentiment. Currently, our cycle view is positive given accommodative monetary and fiscal policy as well as above-trend growth and strong corporate earnings, creating a positive medium-term environment for risky assets.
Whilst valuations in some areas of the market are stretched – such as U.S. large cap and fixed income – we see attractive valuations in some selected areas of equity markets – such as the UK and European equities, as well as emerging markets.
Given the unattractiveness of fixed income markets – which are offering negative yields when adjusted by inflation expectations – we are happy to keep a high exposure to equity and convertible bonds within our portfolios. As we believe that the valuation of U.S. stocks is high, we prefer UK stocks and, more specifically domestically oriented companies which should benefit from the post-pandemic recovery. The removal of Brexit uncertainties and the potential for an increased level of mergers and acquisitions, as we have seen recently, is also supportive for this area of the market.
Any opinion expressed is that of Russell Investments, is not a statement of fact, is subject to change and does not constitute investment advice.