Five Multi-Asset Strategies for 2020’s Challenges

January 20, 2020

4 min read

Daniel Loewy, CFA| Chief Investment Officer and Head—Multi-Asset and Hedge Fund Solutions

Karen Watkin, CFA| Portfolio Manager—Multi-Asset Solutions

The last decade produced great performance across most asset classes. But in the 2020s, we expect investment market returns will be lower and risk harder to manage. Looking forward, a disciplined multi-asset approach will be especially valuable to identify opportunities and help mitigate setbacks.

Powerful returns in 2019 meant that strategic allocation didn’t matter all that much for investors. Equities led the way by notching a new high, but performance was strong across asset classes and categories, from stocks to bonds to real estate and other diversifiers. This trend has persisted for most of the last 10 years.

But the good times may be coming to an end. We believe markets will face profound changes in the decade ahead. Secular challenges include adverse demographics in developed economies and in China, slow productivity growth and the drag on both consumption and investment from servicing unprecedent amounts of debt. Cyclical headwinds feature high asset valuations (after a decade of easy monetary policy and credit-driven expansion), populist pressures and rising geopolitical risks.

While this does not mean a protracted sell-off is around the corner, we expect lower market returns across most asset classes over the next 10 years (Display). Meanwhile, downside risks will proliferate and heighten as policymakers struggle to find effective responses to these intractable problems.

Higher Risk, Lower Return for Investors?

Past performance is not necessarily indicative of future results. There is no guarantee that any estimates or forecasts will be realized.
*Bonds are represented by 60% global investment-grade bonds and 40% global sovereign bonds; stocks are represented by a universe similar to the MSCI World; both are reported in and hedged into Euros.
Reflects compound growth rates from July 1,2009, thorugh June 30, 2019. Stocks represented by MSCI World Total Return Index Hedged To Euros.
Bonds represented 60% Bloomberg Barclays Global Aggregate Corporate Total Return Index Hedged to Euros and 40% Bloomberg Barclays Global Aggregate Treasuries Total return Index Hedged to Euros.
Probability of a 20% peak-to-trough decline in pretax, pre-cash-flow cumulative returns iwthin the next 10 years. Because the Wealth Forecasting System uses annueal capital-market returns the probability of peak-to-trough losses measured on a more frequent bases (such as daily or monthly) may be understated. The probabilities depicted above include an upward adjustment intended to account for the incidence of peak-to-trough losses that do not last an exact number of years.
Source: Lipper, MSCI, Russell, S&P and AllianceBernstein (AB)

With a multi-asset approach, investors can navigate this trickier terrain using a wide range of tools to build a portfolio, from traditional asset classes to beta diversifiers, alternatives, timing strategies and options. Multi-asset strategies can also help income investors rethink how to generate income while managing risks. Focusing on the year ahead, we advocate five strategies to face up to the changing environment:

Be Warier in Equities—Consider Europe and Emerging Markets

Global earnings growth is weakening. In 2020, we expect earnings-growth estimates will fall into the low to mid-single digits. And much of the meager earnings gains will likely be driven by buybacks and corporate financing activities—not sales growth. Corporate profit margins appear to have peaked, particularly in the US, amid rising unit labor costs that may force companies to be more cautious on hiring and spending. In Europe, equity valuations are more attractive, and a weak euro should support the eurozone’s many export-oriented companies. Upward earnings revisions and an improving corporate outlook also favor selective exposure to emerging-market stocks including China A-shares.
Resist the Urge to Ditch Duration

Interest-rate exposure was once seen as the cornerstone of downside mitigation. However, very low and negative government bond yields around the world have raised questions about how much protection duration can provide in a risk-off scenario. Still, the uncertain outlook for growth and risk-asset returns justifies a risk-management approach that offsets some equity exposure with interest-rate exposure. Even in Europe, where yields are low, duration can help, in part because the curve is steeper than that in the US, providing greater return potential.
Consider Select Alternative Strategies

Select alternative strategies offer beta diversification and attractive risk/return characteristics. For instance, liquid alternative strategies have struggled in recent years but may be set to come into their own. With the 2020 market outlook uncertain at best, investors willing to pursue volatility-harvesting strategies that sell protection against rising risk may earn attractive premiums and potentially boost overall returns. It might also be worth considering merger arbitrage strategies. Companies are struggling to find organic growth opportunities, and low borrowing costs may enhance the appeal of strategic acquisitions to boost growth.
Unfollow the Trend

Growth and geopolitical risks could make it difficult for markets to establish lasting trends. So investors should avoid putting too much weight on trend-following signals, such as volatility or momentum, and should reassess their risk-management strategies frequently. In our view, a muddle-through period with risk-on/risk-off swings is the most likely road ahead. In those conditions, it makes sense to put more emphasis on signals that capture underlying market fundamentals. These include valuations, corporate balance-sheet quality, stimulus and inflation.
Broaden Your Income Horizons

Generating income when more than US$12 trillion of high-grade debt carries negative yields will be a major challenge, too. To avoid taking excessive risk, we think investors should widen their horizons. Within fixed income, that means taking a global, multi-sector approach. For example, an allocation to US high-yield bonds is a useful income diversifier with solid fundamentals, in our view. But it also means looking beyond bonds and embracing a multi-asset strategy that can uncover opportunities in real-estate investment trusts (REITs), master limited partnerships (MLPs), securitized assets and even global equities.

Applying these five principles in a disciplined multi-asset strategy is a good way to usher in the new decade. Drawing on diverse parts of the capital markets can help investors capture resilient return drivers while reducing the risks of the new and tougher challenges that the 2020s are likely to bring.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams. Views are subject to revision over time.

About the Authors

Daniel Loewy, CFA

Daniel Loewy is Chief Investment Officer and Head of Multi-Asset and Hedge Fund Solutions. He oversees the research and product design of the firm’s multi-asset strategies, as well as their implementation. In addition, Loewy is Chief Investment Officer for Dynamic Asset Allocation, and is responsible for the development and investment decision-making for that service. He is also a member of the Real Asset Investment Policy Group and the Target Date Investment Oversight team. Loewy previously led the Wealth Management Group’s research on the major investment issues faced by our highest-net-worth clients, including asset allocation, alternative investments and tax management. Prior to that, he was a research analyst in the equity research department, where he followed the aerospace and defense and capital goods sectors. Additionally, Loewy has served as an associate portfolio manager for our value equity services. He holds a BS in industrial and labor relations from Cornell University and an MBA from Columbia University, and is a CFA charterholder. Location: New York

Karen Watkin, CFA

Karen Watkin is a Senior Vice President and Portfolio Manager for the Multi-Asset Solutions business in EMEA. Along with being Portfolio Manager for the All Market Income Portfolio, she is responsible for the development and management of multi-asset portfolios for a range of clients. From 2008 to 2011, Watkin was portfolio manager for the Index Strategies Group, responsible for the development and management of AB’s custom index strategies for institutional clients in EMEA. She joined the firm in 2003, after spending three years as a management consultant in the Capital Markets Group at Accenture. Watkin holds a BA in economics with European study from the University of Exeter and is a CFA charterholder. Location: London

Five Multi-Asset Strategies for 2020’s Challenges

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