Managing multi-asset investments amid event-driven volatility

The recent Brexit vote in favor of the U.K. leaving the eurozone in June of this year caught many market participants by surprise. Developed equity markets immediately see-sawed down, then back up almost as fast, as safe haven assets like 10-year U.S. Treasuries rallied strongly.

Amid this extremely volatile backdrop, our global strategist team released their quarterly outlook report earlier this month, which helps to guide the firm’s multi-asset investment portfolios and services. This quarter’s report focused on the Brexit vote’s potential impact on portfolios. In a nutshell, they reiterated that such volatility in the otherwise lackluster market environment of 2016, given relatively expensive valuations across many asset classes, creates opportunity.

That’s how our multi-asset portfolio management team sees it too.

In many of our multi-asset portfolios, we faced some immediate headwinds from our overweight to the Europe ex-UK segment of the global market. However, these headwinds were more than offset by other positions in these portfolios– in particular, lower beta exposure overall, our use of options protection strategies on our U.S. equity exposure, strong performance from a deep value global equity assignment and our overweight to the U.S. dollar relative to the Australian dollar.

Focusing on options protection strategies as an example to show how such volatility can present opportunities: About a week in advance of the ‘Brexit’ vote, when bearish sentiment had spiked, a nimble multi-asset investor could have sold out of the money puts on the Euro Stoxx 50®, collect a premium, in effect adding to their European equity position in a risk-adjusted manner. That is, if markets were to sell off a further, buying European equities also would have coincided with our strategists’ ‘buy the dips’ strategy recommendation as outlined in their quarterly report.

The ‘Design’ element of our investment process, which encompasses our long-term strategic asset allocation across a diverse set of asset classes, certainly can help mitigate downside risk in absolute terms. That said, over the past year, it’s the ‘Construct’ (manager excess return) and ‘Manage’ (tactical positioning) parts of our investment process that have added the most value in relative terms.

Moving into the third quarter, in consideration of Brexit-related volatility, we remain defensive with the following general framework:

  1. Not ready to increase risk meaningfully, but potential buyers of EMEA ex-UK equities if markets continue to fall.
  2. Monitor as the dust settles to adjust risk exposures elsewhere in the portfolios – for example, in weights of managers and re-casting of aggregate portfolio exposure to ensure no unintended factor, geography, or currency exposures.

Our approach on positioning concurs with our strategists’ views stated in their quarterly report, in which they discuss how Brexit has downgraded their business cycle outlook for the UK and Europe.

They also write in the report: “It’s not all bad news: Europe’s economy had been improving, the currency declines will provide support, and equity market valuations are reasonable in both regions. The implications of Brexit will take months to work through, so more volatility seems likely.”

And, in our view, perhaps more opportunities for nimble investors.

For our strategists' latest forecast, see the 2016 Global Market Outlook- Q3 Update.