“A better distribution within the traditional investment portfolio is 78 percent shares and 22 percent bonds,” DWS’s head of multi-asset Bjorn Jesch said. “Possibly with the addition of alternatives, to reduce the portfolio risk.”
That is what Jesch said early this week during a DWS outlook meeting. Ten years ago, for a similar return target (3 percent), it was still 97 percent bonds and 3 percent equities. To keep the portfolio risk a little lower, the addition of alternatives would offer a solution. The new traditional portfolio allocation could be 54 per cent equities, 20 per cent alternatives and 26 per cent bonds.
Emphatically, the proposal is a simulation that takes into account only these two asset classes, DWS said in a note. “This is not a DWS recommendation, as we prefer a more diversified portfolio with different asset classes.”
Investment opportunities 2021
Jesch names alternatives as one of the promising asset classes for 2021 anyway, alongside corporate credit and emerging market and tech stocks. “Against a backdrop where government bonds are less effective as a diversifier, bond price volatility increases at inflation peaks and QE supports many segments of the credit market,” he says.
As far as Jesch is concerned, government bonds are no longer really worth the risks, given the meagre returns they offer. “We now prefer corporate credit, including high yield and emerging market corporate bonds”, he said. “There are more and more issuers coming into this category, and also they are increasingly ESG-related.”
When it comes to equities, emerging market specialist Sean Taylor is particularly enthusiastic about China because of its focus on sustainability and good growth prospects. Furthermore, Asia’s handling of Covid-19 is a key reason for the investor to attribute a lot of opportunity to the region as a whole. “Many countries have been able to keep the figures well under control, mostly because of their experience with SARS,” he said. “The many years of work they put into health infrastructure came in handy.”
China
When asked, Taylor finds every sector in China interesting. “We invest heavily in e-commerce, EV and the whole supply chain,” he explained. “In other emerging countries it works differently: there we really look at a share by share basis and there is no preference at a sector level.”
He also notes that the difference in upside potential between those companies that do well on ESG and those that do not is very large. This is because there is still much room for improvement in the region when it comes to ESG.
On sustainability in general, ESG portfolio manager Paul Buchwitz says investment opportunities for 2021 lie in agriculture 2.0, decarbonisation and the prevention of water pollution. In particular, he mentions the ‘blue economy’, referring to underwater life. “This market is growing enormously and is undervalued by investors,” he said. “Underwater life is an SDG (sustainable development goal), but one of the least invested.” He explained that DWS thinks that this will change. “We are already seeing more interest and a lot of emphasis on the subject from regulators and politicians.”