Active investment management
Add value with tactical updates to the asset mix and underlying active strategies, whilst benefitting from the knowledge and experience of Royal London Asset Management.
The Royal London Asset Management (RLAM) Multi Asset team headed up by Trevor Greetham - apply a tactical overlay to each portfolio within the Governed Range. This is a robust and repeatable monthly asset allocation process which takes shorter term market movements into account.
Our experts constantly monitor the economy to exploit these market movements and steer the Governed Range towards stronger growth by tactically adjusting the asset allocation of each portfolio, within a risk-controlled framework. This is supported by additional oversight from the Investment Advisory Committee (IAC).
If our experts decide that the mix of assets needs to be adjusted, we’ll do this automatically on your behalf – you don’t need to do anything.
View details of the latest tactical change.
The importance of active management
Head of Multi Asset at Royal London Asset Management, Trevor Greetham, explains why active management is so important in multi-asset investing.
Transcript
People always invest in multi-asset funds with an outcome in mind. People have a savings objective, for example, they may be saving for their pension, in which case they're looking to grow their investments over the long run and beat inflation if they can.
It's very important also to design portfolio that is suitable for different individual attitudes to risk. For example, younger investors can generally take greater investment risk and seek greater returns, because a lot of their future pension pot, for example, will be based on contributions to the pension they haven't even invested yet. So they can take some bigger risks with their current pension pot, whereas older investors tend to be a bit more risk averse. So, we build different portfolios to suit different levels of risk.
We think it's very important to be an active investor and we would actually argue there's no such thing as a passive multi-asset fund. The choice of asset classes to include in the first place is an active choice. You should be adjusting the asset mix, as the investing environment changes, both in terms of the valuation, which gives you a view of longer term returns, but also shorter term developments, and, for example, the business cycle.
Systematic framework for tactical decision – making
The Multi Asset team focus on tactical asset allocation as a key driver of returns – a central part of this is the investment clock.
Asset class rotation and the economic cycle
The thick teal line in the business cycle shown below shows growth – a boom/bust cycle which on average lasts five years. The purple dashed line is inflation. Inflation rises for a while after growth surges, then takes a while before it drops again.
Graph which shows the business cycle and growth (teal) and inflation (purple dashed line).
The thick teal line in the business cycle shown below shows growth – a boom/bust cycle which on average lasts five years. The purple dashed line is inflation. Inflation rises for a while after growth surges, then takes a while before it drops again.
Since growth and inflation are two different cycles this creates four different stages of the business cycle.
Investments will perform differently as we move throughout the cycle, which can present opportunities for tactical decision-making. For example:
- Bonds do well in the reflation phase where both growth and inflation is falling
- Stocks do best in the recovery phase where growth is strong, and inflation is still falling
- Commodities tend to do best in the overheat phase where there's strong growth and rising inflation
- Cash performs best in the stagflation phase where growth starts falling again, but inflation remains high.
The investment clock
The investment clock relates the global business cycle to the performance of various investments.
This helps us easily identify which stage of the business cycle we’re in and where the economy is heading in terms of global growth and global inflation. So you can have confidence that we’re taking steps to invest your clients’ money in the right asset classes, at the right time.
Discover how the investment clock is used by the Multi Asset team to inform tactical decisions.
Video Transcript
The investment clock is a way of linking the performance of different investments to the global business cycle. We think about it in terms of a clock face, and where you are on that clock is determined by what's happening to global growth and global inflation.
For example, when you have a disinflationary slowdown, so weak growth and falling inflation, government bonds tend to do very well, because interest rates are cut by central banks, inflation expectations are dropping and all of these things boost the bond markets.
When interest rate cuts take effect, and you get an economic recovery, if it's still disinflationary, that's the best of all possible environments for stocks. Because when you've got a disinflationary recovery, you've got loose policy, interest rates are still low, but companies are suddenly making profits and share prices go up.
When growth is strong for too long, you've got an overheat. So what happens there is inflation starts to rise as commodity prices are going up, and there's too much money chasing too few goods. Central banks then start to raise interest rates, to try to reign in that inflation. And in that stage of the business cycle, the overheat commodities tend to be the best investment.
And then finally, of the four different stages of the business cycle, we have stagflation. Now stagflation is a slowdown, but, with inflation still high or rising. In stagflation, you've got an economic slowdown, the prospect of weaker profit growth from companies that Central Banks maybe raising interest rates and that combination tends to be pretty bad for stock markets.