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Has the landscape for offshore multi-asset investors changed?

10 December 2015 Michael Kelly, PineBridge Investments
Michael Kelly, New York based, Global Head of Multi-Asset at PineBridge Investments.

Michael Kelly, New York based, Global Head of Multi-Asset at PineBridge Investments.

The return of returns.

Multi-asset investing has changed dramatically since the global financial crisis. Pre-crisis, international investors were very happy to take a long-term approach to risk and return, with most of their attention focused on the return, rather than the risk elements.

However, according to Michael Kelly, New York based, Global Head of Multi-Asset at PineBridge Investments, this dynamic has changed since the crisis, with investors now focused predominantly on risk. “We’ve never quite found the happy medium, with investors leaning too far in one direction, and then reacting too extremely in the opposite direction.”

He says that in the last five years, it really hasn’t mattered whether investors have been focused predominantly on risk or return, as the central banks have de-risked the system by introducing quantitative easing and keeping interest rates at low levels, leading to both strategies producing positive results. “Every asset class has been acting like a low risk asset class and at the same time acting as a high return asset class. This situation was never going to last, and in our view the environment we are now entering is one of low nominal returns with rising risk, so both are equally important to consider.

“We also believe that returns will be achieved from a smaller and smaller group of assets, so it might only be possible to earn high nominal returns when being very selective. In order to do so successfully, it will be important to focus more than before on the actual returns across asset classes. We like to call it the “return of returns” as investors are slowly starting to realise that it is not as easy to earn high returns as it has been for the past few years.

He says that some have raised questions about quantitative easing (QE) distorting markets and how investors should actually place values on asset classes in a world of QE. “We think it’s extra important to consider what asset classes should be trading at, even when you have value distorting mechanisms such as QE in place, because they won’t last forever. You then continue to value assets in the same way you always have, consider the fundamentals and ask yourself whether you are paying a price that you would be happy with once quantitative easing has ended.

“If it’s a stock, you should look at what it’s earning, the growth rate and what would be a reasonable multiple given those two factors. You will then do your best to pay a price that’s beneath that fair value, and try to enter when there’s a reasonable prospect for the fundamental backdrop to improve.”

He says Pinebridge Investments has taken a very dynamic approach and does not assume that it has to own all the asset classes all the time. “We only want to own those asset classes that we believe are attractively priced and where the fundamentals may improve. Our approach has always been the same - take a several year medium term perspective and place a value on an asset class. Then cull that list of attractive asset classes where we have conviction that its key fundamentals should improve within 9-18 months”.

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