By Asbjørn Trolle Hansen, head of the Multi Assets Team at Nordea Asset Management
Investors have encountered experienced several periods of severe market turbulence since the global financial crisis – most notably the European sovereign debt crisis, 2013’s ‘taper tantrum’, and the initial stages of the Covid-19 pandemic. Fortunately, the sharp drawdowns experienced proved on each occasion to be temporary, and the bull run for stocks and bonds ultimately resumed.
With numerous asset classes performing positively in unison since 2009, most multi-asset approaches – including the traditional 60/40 portfolio – largely delivered on long-term investor return objectives. In addition, portfolio diversification – which is perhaps the primary attribute of a multi-asset solution – was only infrequently put to the test.
However, as turmoil swept through markets last year – sparked by aggressive central bank action to tame inflation – traditional diversification methods were regrettably found wanting. Historically, fixed income has been the investor instrument of choice to mitigate equity market downside. But many investors were left with nowhere to turn when both stocks and bonds sold off aggressively in tandem last year.
In our view, traditional diversification has for some time not been able to protect investors to the extent it used to. The ‘correlation perfect storm’ we witnessed last year was a painful reminder of this.
The limits of traditional diversification
If traditional asset class diversification has reached its limits, investors can look to adopt differentiated approaches to balancing risk – such as the opportunities available in alternative risk premia. We believe investors can capitalise both cyclical and anti-cyclical return drivers from a broad and diversified set of 30 risk premia spread across strategy types and liquid asset classes.
For example, as an alternative to traditional government bonds in recent years, we have utilised areas such as currency-related risk premia. Attractively valued currencies can provide pleasantly defensive characteristics – the simplest example being the US dollar versus the euro.
While risk assets have enjoyed a strong start to 2023, bouts of heightened turbulence are likely to become a feature of the market environment for the foreseeable future, as central banks continue to fight inflationary pressures and the damaging war in Ukraine rages on.
Stability is set to return to the spotlight
Despite these challenges, it is not all doom and gloom for investors. We are particularly optimistic on stable/low risk equities, which have demonstrated an ability to perform through periods of heightened volatility – as well as periods of elevated inflation.
As is commonly known, equities offer the highest return potential within a multi-asset strategy, but the asset class is also the greatest source of risk. Therefore, it makes sense to identify companies displaying a greater degree of solidity in stock price, earnings, dividends, EBITDA and/or cash flows than the broader market.
In our view, stable, high quality and attractively valued companies – which historically offer more resilient earnings – are naturally in a far better position to navigate through this continually challenging economic backdrop. In addition, we look for companies exhibiting pricing power, which have the ability to pass on inflation price increases. This is a valuable characteristic in the current climate. Also, stable/low risk equities continue to offer a 1.7%[1] earnings yield premium versus the broader market. This is an incredibly attractive building block for portfolios in the months and years to come.
About Nordea Asset Management
Nordea Asset Management (NAM, AuM 241bn EUR*), is part of the Nordea Group, the largest financial services group in the Nordic region (AuM 362bn EUR*). NAM offers European and global investors exposure to a broad set of investment funds. We serve a wide range of clients and distributors which include banks, asset managers, independent financial advisors and insurance companies.
Nordea Asset Management has a presence in Bonn, Brussels, Copenhagen, Frankfurt, Helsinki, Lisbon, London, Luxembourg, Madrid, Milan, New York, Oslo, Paris, Santiago de Chile, Singapore, Stockholm, Vienna and Zurich. Nordea’s local presence goes hand in hand with the objective of being accessible and offering the best service to clients.
Nordea’s success is based on a sustainable and unique multi-boutique approach that combines the expertise of specialised internal boutiques with exclusive external competences allowing us to deliver alpha in a stable way for the benefit of our clients. NAM solutions cover all asset classes from fixed income and equity to multi asset solutions, and manage local and European as well as US, global and emerging market products.
Having entered the ESG space over 30 years ago, Responsible Investment is deeply rooted in our Nordic DNA. As an ESG pioneer and market leader we established an award-winning RI Team in 2009—now one of the largest in Europe. We currently offer a broad suite of RI solutions to investors of all types across the globe.
* Source: Nordea Investment Funds S.A., 31.03.2023
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[1] Sources: Nordea Investment Management AB, Multi Assets and Bloomberg. Data as of 31.03.2023.