- Co-Head, Investment Strategy
- About Us
- My Account
The views expressed are those of the author at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional, institutional, or accredited investors only.
iStrat is the investment strategy and solutions group within Wellington. We are allocators and investors, like our clients. So, where do we think the investment focus should be in the coming year? I’ll highlight three areas that are top of mind:
Over the last few decades, the negative correlation between equities and bonds has provided an excellent balance to many allocations. This last year saw both markets decline, and this positive correlation turned the equity/bond relationship from risk-mitigating to risk-additive.
As our team explained in a recent article, the shift in correlation was driven by the evolving economic environment. Over the past decade, markets came to assume that central banks would respond to any deterioration in macro conditions by cutting interest rates and doing, as former ECB President Mario Draghi once put it, “whatever it takes”. This helped maintain the negative correlation: a struggling economy is negative for equities but positive for duration when the response is lower rates. But now central banks face higher inflation, setting up the potential for a difficult choice: loosen monetary policy if the economic outlook worsens or hike rates to stem inflation. Bonds will struggle in this environment and especially if central banks are perceived to be behind the curve in the inflation fight.
We think inflation will remain a challenge (even if it’s not at current 40-year highs) and central banks and governments will be forced to wrestle with this growth/inflation trade-off. While bonds may still play an important role in portfolios given their potential for income, liquidity and total return enhancement, this high-inflation regime may limit their diversification and downside protection roles. To prepare, allocators may want to consider strategies that can complement the protective role of bonds, including:
In the new economic reality described above, where central banks can no longer focus exclusively on maintaining stable growth, our macro strategist team has argued that we will see a return to a traditional economic cycle with distinct and possibly more frequent moves from one phase to the next. We also expect more cyclical divergence between countries as policymakers make different decisions about the growth/inflation trade-off and as globalization is unwound. Cyclical volatility will likely translate to increased volatility in macro-driven assets, including rates and currencies. This may create challenges but also opportunities to consider:
We believe that we are in the midst of regime change — that is, the economic shifts we’re witnessing are likely structural rather than cyclical (hear more on the subject from Macro Strategist John Butler). With this in mind, we think 2023 will be a year for allocators to ensure they are positioned for the change.
Income investing in multi-asset portfolios: Tipping the balance in your favour
Income can play a crucial role in the pursuit of investment objectives over time, but research from our iStrat Team argues for a balanced approach to asset allocation decisions given the potential trade-offs between income and capital return, risk, and portfolio diversification.
More from the core: How fundamental extension (140/40) strategies could help
Extension strategies may offer investors more flexibility in portfolio construction, along with potential to achieve greater risk-adjusted returns, thus delivering “more from core” in equity allocations without taking on significantly more tracking risk.
Three themes (and what they mean) for income investors
With several macro crosscurrents at play, Portfolio Manager Peter Wilke suggests that income-oriented investors not lose sight of the “big picture” in their quest for yield.
Role, risk, and residual alpha: A framework for manager research
With many asset owners revisiting their strategic asset allocation and considering changes in their investment line-up, Director of Manager Research Kat Price and Head of Multi-Asset Strategy Adam Berger offer their views on manager selection best practices.
Core fixed income: Stop me if you’ve heard this one before
Head of Multi-Asset Strategy – Insurance and Portfolio Manager Tim Antonelli updates insurers on the status of the market today, shares what he believes they can expect for the rest of the year, and identifies areas that may be worth a closer look.
A test for the global economy
What are the similarities and differences between the US regional banking crisis and 2008's global financial crisis? How likely is a recession? Should investors be focusing on value or growth? In this podcast, Macro Strategist Nanette Abuhoff Jacobson shares her interpretation of where the economy is headed, outlining where the risks and opportunities may lie for investors in the next 12 months.
How to weather the storm: A roadmap for more resilient portfolios
As we face a new era of elevated market and cycle volatility, Co-Head of Investment Strategy Natasha Brook-Walters assesses how asset owners can ensure that their portfolios are up for the challenge.
How a thematic approach can help harness change within portfolios
Multi-Asset Strategist Supriya Menon and Investment Director Andrew Sharp-Paul discuss why a thematic approach can help harness change within portfolios against a structurally different macroeconomic backdrop.
2023 Mid-year Investment Strategy Outlook
To help think through the asset allocation outlook and implications for 2023, we offer views from iStrat, our investment strategy and solutions group
Multi-Asset Outlook: A recession is looming…or is it?
The economy has largely shrugged off the banking crisis and other concerns this year, while riding positive sentiment driven by AI enthusiasm and a possible soft landing. Members of our Investment Strategy team offer their macro and market outlook for the second half of the year, including their latest views on equities, bonds, and commodities.
Thematic investing focus: Cloud-backed AI and enterprise intelligence
Cloud-based computing and artificial intelligence are transforming the way enterprises operate, creating what we believe will be a secular tailwind for companies providing software, machine learning tools, and cybersecurity.