Speaker 0:
Hello and welcome to this multi asset master class on Asset TV. I'm Rory Palmer. We're here today to discuss what areas of the multi asset space is going to do well and the opportunities and how multi asset investors can keep pace with inflation. Well, here with me in the studio to discuss that we have Trevor Greetham, head of multi asset at rural London Asset Management. We have Simon Evan Cook for manager at Downing.

Speaker 0:
We have Tom Danaher, product specialist at the Bailey Giffords Sustainable Income Fund.

Speaker 0:
Thank you very much for being here. Good morning, Simon, Can I start with you? So, looking at the data for the first three months of this year, she had a lot of outflows from more cautious multi asset funds and investors piling into more aggressive options. What's behind this risk on environment? I think there are a few things behind it. Primary is that if you look at last year, what happened to cautious funds, you've got to say a lot of cautious funds dropped the ball last year, and that is a pain in the neck for financial advisors because

Speaker 0:
if you think about what their lot is they're trying to find, as the name suggests, a cautious fund for those clients who are perhaps the most jumpy about risk. So for them, seeing a year like last year where their cautious offerings were the ones that got hit the hardest is extremely hard for them, right? So that's got to mean you are now looking at everything you're holding and you're buying. And if those funds didn't do their job,

Speaker 0:
then it's not surprising to see them being sold or being swapped out. Now, why? Perhaps that money is shifting to more aggressive mandates. More maybe equity heavy mandates.

Speaker 0:
You could look at that a couple of ways. There's a part of me that thinks, actually, that's relatively sensible, and maybe we'll talk about that later in terms of how you protect yourself against inflation, what tools are available to you and equities are quite good for that. But there is another part where with cautious funds, perhaps it's as we often see in our industry where

Speaker 0:
something bad has happened and then the horses run off and you're bolting the door after it's gone. So we're selling cautious funds after what it was a horrible year for them. But perhaps we won't see a year like that for a long time, if ever. So again, we're seeing that aspect of perhaps cautious. Funds are genuinely more cautious now than they were a year or so ago. Uh, but people are now moving out into more aggressive because of what happened last year.

Speaker 0:
Trevor, welcome to the show. And do you think dropping the ball is a fair assessment there for I think it is. I think there'd be a lot of soul searching about risk ratings. And you know why these supposedly low risk funds? Some of them saw double digit losses, not just double digits. Some of them lost you 20% or more in 2022. And I don't think there's anything wrong with the the whole risk rating system and the volatility system that people use to categorise funds. I just think a lot of those cautious funds weren't diversified enough,

Speaker 0:
and they were too heavily invested in long duration. Fixed income, which are the yields that were prevailing in late 2021 had turned into, you know, return free risk rather than risk free return. So I you know, you you've seen the outflows from those cautious funds. I think people should be looking for other cautious funds that did better in 2022 rather than going up the risk spectrum, because what we've got to bear in mind is something really weird happened in 2022

Speaker 0:
with equities because UK equities went sideways, not down. And Global equities in sterling terms went sideways not down because the S and P fell about 20%. But so did the pound

Speaker 0:
and that that sort of sterling weakness actually, is what mean made equities look defensive in 2022 if you speak to American Financial Advisors, their cautious funds and their aggressive funds all lost loads of money because the equities went down and the bonds went down. So there's a currency effect there as well. And and the danger is if you if you move people from low risk funds to more equity heavy funds now and we could be heading into a recession with with, um, you know, with a with A with a strong pound and a weak dollar,

Speaker 0:
then then they may lose money twice. So I'd be very careful about moving people up the risk spectrum and look instead for better low risk funds. OK, so stay within the cautious space. But your customer genuinely fills in a new questionnaire and says, You know, I've had a change in my circumstances, and now I want to take loads of risk. Fair enough. But I wouldn't be encouraging people to to move more into equities now if they are genuinely low risk investors. I think a lot of multi asset fund managers to do a bit of soul searching because

Speaker 0:
particularly the the the funds that claim that they can go anywhere. You know they've got complete free range because I think Trevor's absolutely right. You go to the start of last year, Uh, with bonds yielding what they were offering. You have to ask your multi asset fund manager a question. You have to say,

Speaker 0:
Why were you holding Bonds? Did you not realise how risky they were? Or did you realise how risky they were? And you were just following the crowd? And I don't think there's a good answer to that question, So I would absolutely agree that, uh, if you're looking, you should be looking at at different cautious funds funds that actually proved to be cautious or delivered on what they said they would do because far too many

Speaker 0:
just seemed to be quite happy to sit in the herd and hold bonds just because everybody else was doing it. And Tom, welcome to you. And and from an income perspective, what have you really heard from from clients from investors for the first four or five months of this year?

Speaker 1:
Well, I think the point Rory that Simon made about the horse having bolted as people are fleeing from cautious funds is a really interesting one. And if you take last year, for example, the safest assets of a multi asset portfolio were among the worst performing.

Speaker 1:
So for our sustainable income strategy, we benefited from having allocations within fixed income

Speaker 1:
to less traditional areas of the fixed income market and in a difficult year for both equities and bonds. Actually, an asset class like emerging market bonds, held up relatively well as guilts plummeted. So having that flexibility as, um, Simon and Trevor have both mentioned has been really, really important

Speaker 0:
and and in your in your view, how can multi asset investors keep pace with inflation? because it's been difficult this year and and what can they really do to hedge that and and manage their portfolio?

Speaker 1:
Well, the short answer is with as we sit here today, the Bank of England, having raised rates 11 times and with inflation above 10% is that keeping up with inflation this year is going to be really tough. And clients in our sustainable income strategy understand that. So what we try and do in sustainable income is to try and keep up with keep pace with inflation, that income stream over periods of five years, and that allows us to give

Speaker 1:
make much longer term decisions and say Right, OK, let's look around the world at equities, bonds and real assets and which assets are going to give us the best chance of keeping pace with UK c p I. Not today. Not this year, but over five year period.

Speaker 0:
Trevor, when we caught up uh, prior to this, you mentioned Spike being an issue. Could you explain to the listeners what that is and might be an issue? Sorry, I I mean a new word.

Speaker 0:
So stagflation is what we came from in 2022 which was a an economic slowdown with rising inflation.

Speaker 0:
Um, I think inflation is probably peaking at the moment, and it could come down a long way. If you look at commodity prices, they've been very weak. It takes a while for that to feed through into consumer prices. But we're already seeing outside of the UK consumer price, inflation come down quite smartly. So so The spike in inflation, we think, is likely to kind of subside quite a lot in the next year.

Speaker 0:
But what we'd say is don't give up on your inflation hedges because I think we're in a much more inflation prone world and there are various reasons for that. But one of them would be, for example, the move towards net zero. So so fossil fuel producers are not investing in new capacity like they were in the past, which means you hit bottlenecks and commodity prices can spike. You've got a much more dangerous world in terms of what's going on with Russia and the deterioration of relations with China, and that can also result in spikes in commodity prices.

Speaker 0:
And you've just got a world awash with debt, which gives governments an incentive to let inflation overshoot. Do you think about the UK? We've got a 2% inflation target. We're just coming off 10,

Speaker 0:
10% inflation. And the Bank of England would be really chuffed if they could get inflation down to four this year and two next year. That 10 did actually happen. It has actually increased the cost of living, and they're never going to pay it back to you. They're never going to give you a a, you know, a minus six or something. So these inflation shocks when they happen. They do affect people's finances. And so you need inflation hedges like commodities. I think like commercial property and also things like UK equities, which are much more inflation resilient than

Speaker 0:
than the sort of US growth stocks.

Speaker 0:
So what do you think about spi? Inflation as a as a term. I think you've got to be ready for anything, right? I mean, I think 2022 showed that perfectly because we'd had 10 years of low and falling inflation, and all of a sudden, bang inflation is back with a with A with a huge trump. So

Speaker 0:
But what I what we don't do or what I never do is try and predict exactly what is going to happen. So we did OK in 2022 because we were ready for the fact that inflation might come back. That's very different from predicting that it would come back. So hence why we had a balanced portfolio. Hence why we were avoiding Bonds, because there was no situation where that they would be good only situations where they could be really, really bad.

Speaker 0:
So you are not predicting spike inflation, but it sounds like a completely feasible scenario. That might be what happens. But at the same time, I'm ready for us to go back to what we saw for the previous 10 years of, of of sort of low inflation and low growth. If that's what happens, I'm ready for us to to go back to the seventies of consistently high inflation. If that's what's needed, too, it's it's understanding that anything could happen. And if you put all your chips on one of those outcomes,

Speaker 0:
you could really end up doing your clients a whole load of harm. I think Sim's absolutely right. I think this in our mind we we think We're all active fund managers, so we can all agree the sort of fixed weights passive exposures were pretty pretty dangerous in 2022 particularly at the lower risk end of the spectrum with all that bond exposure. But you you do have to think about your asset mix to give you some resilience, and you do have to be valuation aware. And so, you know, like like Simon when we were

Speaker 0:
looking at fixed income in late 2020 21 2022 our equivalent of a 60 40 fund, 60 equities, 40 bonds and less than 10% in bonds. So we had a very low exposure to bonds. But now we've changed our strategic mix. We've recently added quite a bit to bond exposure across all of our funds because when bond yields are four, that they're a better buy than when bond yields are zero. Um, so things have moved very fast and that extra bond exposure would give us some resilience. If there's a deflationary phase coming

Speaker 0:
and they'll put about spike inflation is it. You know, spikes are unpredictable and there may be another spike in inflation. Three years, four years, five years from now. They may not be, but what's interesting is you look back at the the periods of history that are thought of as high inflation, and they were all spike inflation. So the seventies World War Two, World War 13 big inflationary periods in each example, the price level either doubled or quadrupled

Speaker 0:
and inflation spiked up to 20%. It came down to zero. It went back up again to 15. It came down to two. Uh, that's what high inflation is. Isn't high, steady, predictable inflation. It's unexpected spikes, and that's what you have to be at least ready for. Tom. Those traditional, uh, income payers are very susceptible to sort of spikes in inflation and commodity prices.

Speaker 0:
What are you really looking for when you're looking at those stocks? Yeah,

Speaker 1:
So what we're looking for within the equities that we own in our Sustainable Income Fund, which represents about 40% of the portfolio today, are companies that can grow their dividend resiliently whatever the economic weather. So in Trevor's scenario of having spike inflation, if you take our biggest equity, for example, the

Speaker 1:
Danish pharmaceutical company Novo Nordisk, we can sit here today and over our five year investment time horizon have a good degree of confidence that people are still going to be buying its obesity and diabetes drugs. So those companies that can grow whether inflation stays at 10 for a while or settles down, can grow their dividends above levels of inflation over time.

Speaker 1:
That's what's gonna pay the monthly income to our clients.

Speaker 0:
So I'm saying, with equities, what are you seeing? Some opportunities? It cost small accounts. Where are you seeing that? Yeah, I mean, when you look at equity markets, there's a big dialogue going on. At the moment, equities look expensive, but when you really dive down into that and look within it, quite a lot of that comes from the fact that the biggest companies in the US are really quite expensive now. They're quite often fantastic. Companies likes of Microsoft or alphabet,

Speaker 0:
no argument about that whatsoever. But they are quite often on high valuations if you get away from that, Uh, and obviously we start to get into the active versus passive debate a little bit because if you are in the active world, you're naturally going to be dragged away from those high concentrations of US mega caps that you find in the global index or you find in in the US index.

Speaker 0:
But really, when you look almost anywhere else in the world, you're finding active fund managers getting really very excited about the opportunities you see. And there's no better place, I think, than right here. The UK, currently the UK small cap managers. We hold UK. Midcap managers. I mean, they are absolutely thrilled at the companies that they own, how good they are, how resilient their businesses are

Speaker 0:
and the prices you're having to pay for them. They are on completely unchallenging valuations in many cases, the sort of valuation that suggests that you could quite easily make 8 to 10% from a decent portfolio of companies UK small M companies over the next 10 years or so. Now that's to me a pretty good way of matching inflation. I mean, let's say worst case scenario that inflation does stay at 10% for the next 10 years. I don't think it will do, but it could

Speaker 0:
then actually having that kind of portfolio. That kind of firepower is possibly the only way to protect yourself against really, really high inflation because you're buying companies that are raising prices, growing their business, and you're not having to pay a high valuation for that at the moment. So when it comes to inflation protection, as far as I'm concerned, I completely agree with with Tom that equities are the asset class. The rub always the rub is that you've got the short term volatility. So in any given year

Speaker 0:
it might beat inflation. It might not beat inflation, but the trick then, is to extend your time horizon. So you're thinking about five or 10 years not worrying about one year or six months, or three months, or a month or a minute or whatever it is that people are worrying about nowadays. Joe, is that a fair assessment of UK valuations? Oh, I think it is. I mean, um, we we've in our global multi asset funds, our G up funds or our governed range. We've always had an additional UK equity allocation alongside global equities, and that's partly because those funds

Speaker 0:
have an objective to to maximise returns after inflation, for given the level of risk, and we find, if you look at even going back to the sixties. If you look at periods of rising and falling inflation, UK equities tend to be more consistent. So you know, you get something like a 10% average real, uh, well, 5% average real return from from UK equities over that period. But it's five whether inflation is rising or falling, whereas you looked at global or US equities, and they tend to give you 10% real return

Speaker 0:
when inflation is falling and zero real return when inflation is rising. There is that sectoral mix, I think, um, which means there's a kind of value tilt to owning UK equities. But I think you've got a hedge inflation over different time horizons. So we've got commodities as well, which will give you a hedge against the here and now. Inflation of a of a commodity shock. Uh, we've got index link guilts in the portfolios, uh, which gives you some kind of hedge against inflation expectations changing

Speaker 0:
and then absolutely equities. But also commercial property have a a real income stream, which gives you a very long run hedge against inflation. The rubbers that valuation can go anywhere, you know. So I think about the seventies and the seventies. You know, in the seventies, earnings per share had a brilliant decade. Share prices had a terrible decade. You got that back there in the eighties because in the eighties, multiples expanded back to where they were in the sixties, and they were on that much bigger earnings number.

Speaker 0:
So if you're willing to be a longer term investor, then the equities and property are brilliant hedges, because that that's quite often the difficulty. If you look at a lot of studies that look at what performs well in inflationary environments, they're very reductionist in the sense that they just look at previous periods what they maybe don't take into account of what preceded that. So you look at the seventies and equities have been on a tear through the late sixties at the time of the Nifty 50

Speaker 0:
so that happened at a time of very, very high valuations. Would it have been the same if you'd come in with a period of low valuations for equities? Almost certainly not. So whenever you're looking at any of these studies that are out there that simply take a period, this is when inflation started. This is when it finished what did? Well, they will depend entirely on so many more circumstances than just inflation. And what else was happening in the world? Were there wars happening? Was there

Speaker 0:
currency crises? Was their political strife? All of these things play in, so you have to play the ball as it lies. Almost. You have to see what the conditions are, where the valuations are at any given time

Speaker 0:
and then adjust your portfolio so that it sits well with that. Rather than just relying blindly on past data. Trevor going back slightly commercial property has not done so well in the return to office, especially in the US, has been quite low. What do you think the outlook is looking like for there? Well, I look around it. I I still think, you know, I'm in a very strange situation tactically at the moment, because I I do think there are recessions coming that could be quite nasty recessions. But the date of those recessions keeps getting pushed further and further out.

Speaker 0:
Uh, but looking around all the major asset classes UK commercial properties, the only asset class I can point to that may already be pricing in a recession. I mean, the return of the last year was minus 20%. We were underweight property while that was happening, Um, because we were concerned about the rising interest rates and the and the slowdown we saw coming.

Speaker 0:
Um, but I think, really, it's the mini budget that that pushed out the leverage buyers and caused a crash. There's no other word for it in commercial property is now stabilising. And if we have a sort of mild recession, maybe that's all. That's all the damage you're going to see for that asset class. Whereas whereas I think when you start to see unemployment rates rise, I'm concerned, actually, that the earnings weakness will hurt equities. So property could be more defensive at the moment than equities because the drops already happened.

Speaker 0:
Uh, but other asset classes, I mean, high yield spreads are tight.

Speaker 0:
Uh, government bond yield are relatively high. Equities have been on a tear this year. Nothing else feels like it's priced for a recession. But neither can we see signs of these recessions happening right now. So we're kind of long but nervous in terms of risk, and we think as the year progresses. Uh, we got to be a bit more, a bit more careful, but, you know, even the the the the the trouble with the banks in the US, the Silicon Valley bank problems and all the ones we've had since yesterday's

Speaker 0:
Federal Reserve Senior Loan officer survey didn't show things being any worse than they were a quarter ago. So the banks aren't tightening up more Because of that, the big banks have got plenty of deposits. So it sort of feels like, you know, there are problems out there, but at the moment, we're not. We're not, uh, we haven't batten down the hatches because there could be a period here where growth is actually perking up a little bit compared to last year.

Speaker 0:
Um, and inflation is coming down, and that combination on our sort of investment clock, we thinking, is actually quite good for stocks. So what areas do you really think are gonna grow? And where are those sort of sustainable yields? If we're looking over a 5 10 per year, 10 year period for investors,

Speaker 1:
well, we're still seeing attractive nominal yields in fixed income. And

Speaker 1:
of course, we're thinking about what interest rates and inflation might average over the next 5 to 10 years rather than what it's going to be in the next few years. So in the next few months, Rather so those those are areas of the market which we're excited about for the first time in a long time, with overweight fixed income versus our strategic asset allocation.

Speaker 1:
Um, one area, uh, which, uh, the panellists mentioned is is real assets and infrastructure is an example of an asset class that did really well last year because it's not that cyclical in nature, and companies were still grinding out dividend growth. We still see some opportunities there, but we've taken some profits there and reinvested in fixed income where we can still see, see good asset, uh, good nominal returns over the sort of medium term,

Speaker 1:
um, in equities. We're pretty comfortable with how our companies are performing. Uh, that's coming through in the early months of this year with solid dividend growth, and the sorts of income generating companies we're exposed to are really, really different from those that you typically find in an income fund. So we have less exposure to those UK dividends, which proved to be really, really cyclical during the pandemic and much more overseas exposure.

Speaker 0:
Simon a point I wanted to to mention to you and and guest for the other panellists as well. But why are funds of funds at the moment? They're quite out of fashion. What you think is going on? Yeah. Deeply out of fashion. Yeah, uh, it's it's interesting. So I'm in the process of launching four funds of funds at Downing. We should have them up and running in June.

Speaker 0:
You don't hear about people launching funder funds much anymore. Um, and it seems to me it's one of these pendulum swings that happens in the market every now and again. Funder funds were originally came about because go back 25 years, people were running open portfolios of funds and they were found all sorts of problems with doing that. The trading is harder. There are tax implications. So some bright spark came up with the fund of funds and they took over the world for the next 10 years because it was a better way of doing it.

Speaker 0:
But then the last 10 years, you've seen that pendulum swing back the other way and a lot of that is to do with charges.

Speaker 0:
But I also think there's been an element of, um being able to hide for want of a better word because a lot of the open portfolios the MP. S s and the d. F MS there's not the scrutiny on performance that you have with the fund of funds. The fund of funds has a listed price that's available. So I'm almost like a snail if you like, I leave a trail wherever I go. If I screw up, then you're gonna be seeing, you know you're gonna be hearing about that. It's gonna stay attached to my name forever more

Speaker 0:
with an MP S or AD f m. It's until recently it's become a little bit easier to find it. But it's very, very hard to find the performance of those offerings. And therefore, if you haven't got that competition there, I think you get this clustering around a herd again. And I think going back to your first question about 2022 the fact that there isn't that kind of open competition like you get within any I A sector means that it became safer for people just to stick in the herd

Speaker 0:
and not say you know what? Actually the herds wrong on this one. We should be avoiding long duration bonds in that instance. So we should be moving out. But that's yeah. Add on top of that, all the the tax reasons and you've got C g T allowances coming down,

Speaker 0:
uh, imminently. That's gonna make a big difference if you are trading a portfolio and you're having to trade it often As a fund manager, I don't have to think about whether Mr and Mrs Smith are going to have a tax liability If I sell one of my fund holdings. I just do it for investment reasons. Whereas if you're running an open portfolio, you can become somewhat compromised, having to think about the tax reasons for Mr and Mrs Smith. Maybe they've been in the fund for 10 years, and now they've got a big potential C G T liability.

Speaker 0:
What about Mr and Mrs Jones, who joined three months ago and are now being put into the same portfolio, which isn't having that fund removed for them because of somebody else's tax liabilities? None of that is a problem in the fund of funds, and I think it's something that's got missed. So I hope that I'm just about to catch the fashion as it comes back again. But I've tried that with clothes a few times, and it's never worked. So, uh, watch this first. I'm with Simon on this because I think I think the fund of funds, um,

Speaker 0:
you've you've got, I think in many, many cases, a superior product at a lower price.

Speaker 0:
Um, and you know, financial advisors are focused primarily on knowing their client knowing their own circumstances, you know, knowing their own tax situation. Um, you know, I think they can. They can leave the investment to a funder funds manager. Um, and by all means, you know, you might have a a core satellite approach of funds, but a fund of funds, You know, we we we use exclusively Royal London content for our equities and our bonds and our commercial property.

Speaker 0:
And so we don't charge the fees twice, so it's not an open fund of funds. So all the fees within those underlying funds are rebated and we charge a single fee, so it's cost effective and you've got all sorts of safeguards within a within a regulated fund, whether it's nurse or or things like diversification, rules, liquidity rules. Um, you know, on derivatives, there's so much more protection.

Speaker 0:
Um, an inbuilt diversification in a fund. So I'm a big fan of of funder funds. And so I'm just going back to the new the new Downing Funds. Could you explain for the listeners who might not be familiar, the whiskey and water approach the whiskey and water right? So that that doubles up a couple of times. The analogy. So when we're running the funds we have, we basically run two portfolios, so it's four funds. But those funds are a mix of the two components we call one of them the growth component. Or let's call that attack if you like, or the other component is defence,

Speaker 0:
and those four funds are simply a mix of different levels of that, there's all sorts of advantages for doing that. One of them is that you almost put on two hats to run them. So for our if you like the growth part, that is all active fund managers all making bottom up stock decisions. So it's a 100% actively managed portfolio. We can run that with a view to this is gonna make the money over the next 10 years for clients, so it's always positioned in what we consider to be the best opportunities.

Speaker 0:
But at the same time, when we're running the defence portfolio, we put on our kind of different hat and go to a dark, dark place. And we asked the question of what could possibly go wrong with the world and so that part of each of the funds has to be switched on and ready to defend at any given time. And that's crucial because it stopped you as a portfolio manager sending up your defenders to attack a corner.

Speaker 0:
And obviously, then the ball rushes back the other way and your defenders aren't in place, so it keeps us in position. The other reason we call it the whisker whiskey and water analogy is that when we're charging, the way we operate is that we have a Basically, it's a 1% charge for the 100% equity portfolio that's half is R. O. C. F. And that is half is the underlying fund managers again, all active fund managers

Speaker 0:
and we are saying that you can drink that meat. I'm personally happy to drink that meat. I'm 47 now, 25 years old. Until I retire, I can handle 100% equity portfolio, and I like it. But for financial advisers, they're gonna have clients who cannot handle that, either because they're risk averse or because they've got a shorter time till they retire. So we will dilute that simply for them down for different risk. Uh uh, tolerances.

Speaker 0:
But the portfolios remain the same. So for a financial advisor, for example, who is going from a client who was 100% equity? Maybe because they're younger, you can know that you can move clients down that risk spectrum and you're moving them down consistently and not having it moved around or not changing the actual assets that you hold. You're just changing the blend of them, which we've set this up entirely with financial advisor in mind. How do they work? How do they operate?

Speaker 0:
Just trying not to tuck them up. Really? Because it's so easy to get in the way of what they're trying to do with financial plans for their clients.

Speaker 0:
We're leaving as many decisions as possible to the financial advisor who know the clients. Let's remember, I've I've never met them, right? So I shouldn't be making decisions that affect their financial plan. Tom, I want to bring you in here a jump at the

Speaker 1:
bit. Yeah, I'll be diplomatic. There's a place for both funder funds approaches and direct approaches, and it largely depends on your investment objective. And so, for our sustainable income fund, it's very clear one objective, which is

Speaker 1:
to keep up with UK inflation over five year time periods. And that's a directly invested portfolio today. So we've got about 270 holdings across nine different asset classes, and each person responsible for each class asset class knows that that objective is in mind again. It's a product that's suitable for the advisor community, because there are lots of advisors out there with clients who have to fund a retirement, which is

Speaker 1:
now 10 years longer than it would have been 20 years ago. So the advantages of having a direct portfolio is that sole focus on objective there often is a cost advantage as well, and also our clients can see every single holding at an underlying level that we're invested in today. Well, I'm

Speaker 0:
sort of a bit of a blend of the two, Really, Because we we're Although we're a fund to fund structure, it's all internal funds and we can see the holdings on an immediate daily basis. We can run risk on the whole portfolio without having to sort of wait for delays.

Speaker 0:
So, you know, we know all the managers very well and can hold their feet to the fire just as they hold their feet to the fire. So it's it's, um you know, I've got sympathies with both approaches. Actually, I suppose it comes down to then, uh, from my perspective, being independent. It's the number of brains that you've got operating, and they're diverse brains as well. So the reason why I love funder funds, but specifically funder funds holding external funds is that hi brain approach.

Speaker 0:
So having someone who is the best Asian small cap manager in their space making decisions. So if something happens in the world, the US suddenly cuts rates by surprise.

Speaker 0:
I think you're somewhat limited as asset allocator. How you can deal with that if you're just moving blocks of equities around. But I don't necessarily need to do anything because my, for example, Japanese All Cap manager, is changing the portfolio stock by stock to reflect that change. You know, it might be good for one company and bad for another one, so they sell the one it's bad for, and they buy the one it's good for. So

Speaker 0:
what I love about funder funds and specifically having a diverse fund of funds is that that portfolio, as I sit here right now, is being managed for its clients. There'll be a stock that's being sold and another one that's being bought. I won't necessarily even know what that is. But these are all managers that I spend a lot of time assessing, and I know very well and trust. And so for me, that high brain of different approaches you've got value. You've got growth, small cap, large cap quality, whatever it might be, gives you that resilience that

Speaker 0:
potentially you don't necessarily get. If you're buying from a single house, I mean you want to avoid I mean, you know, we have a lot of these discussions. I'm sure you do as well that you want to avoid group think so? You know, Royal London doesn't have a house view. For example, we have very distinctive investment processes on different desks. We have a life cycle approach to equities. From Peter Rutter. We have, uh, a fixed income approach that really values, uh, getting asset backing in the event of a default from Jonathan Platt

Speaker 0:
as a Hussein and high yields got his own process. Physical property. We manage the buildings, we developed the buildings. These are all very distinctive processes, actually, so we have a collegiate approach, but we don't have a house view approach, and that helps. I think and and, you know, we've all got access to the hive mind outside of our firm as well. So

Speaker 0:
I think we're all we're all talking to the same story. We've got different different ways of approaching the same problem. Absolutely. But Tom coming back to you when we caught up before this week talked about the total return approach being completely broken for the last 10 years. And since the the crash, it's worked really well. But now it's all about income. You know what? What's what should investors really look out for and And what do they need to plan for

Speaker 1:
incomes back, back? So the last decades, let's put ourselves in the shoes of a UK retiree. So you go from earning your salary to taking a retirement income. And many of those investors have gone down the drawdown path where you take your pension pot and you may take the income from it and then chip away at the capital. Well, if we think about the last 10 years until last year where, whether it's equities or bonds, those asset prices have appreciated in value. So from a practical perspective of our retiree,

Speaker 1:
that's a great place to be, because you can take your income and then sell your units at a profit as and when you need, uh, as and when your liability is fall due.

Speaker 1:
Then take last year equities and bonds going down in tandem in that sort of environment, what does my UK retiree want? They want a monthly stream of income, pounds and pence that they can depend on, and they know how much is going in their bank account each month. Uh, so that's that. That's why the income is is increasingly important So as we move into this environment, whether it might be spike inflation, as as Trevor suggests, or something even more volatile

Speaker 1:
that we think income is really, really increasingly important. And and that's true across asset classes,

Speaker 0:
I guess some retirees could be faced with a difficult situation where they they almost run out of money before they hit the date in which they retire. It's so hard, right? I mean to just to plan that, to know that you might be around for another 40 years, uh, and to know how to plan that. And that's where I do agree that natural income has an advantage if you're not eating into your capital.

Speaker 0:
But ultimately, I think natural income is one of the the weapons in your arsenal if you like. I think it's a and it's a it's a potentially good one. But obviously this is where the advisor comes in because they'll know every client's tax situation, life expectancy, age and for a lot of clients, they simply haven't got enough capital to actually earn enough income off of the off the pot they've got. So they unfortunately faced with eating into the capital

Speaker 0:
to some extent or another. So possibly natural income, possibly a blend. But ultimately I I'd leave that up to the financial advisor because they know the clients. So what do you think? Well, I think Deum generally, um, is something that the asset management industry hasn't properly addressed yet. And if you think about the typical Deum fund, would be a low risk, multi asset fund that probably had way too much and long duration bonds in 2022. So you might have been sitting in a fund that's lost you 15 or 20%.

Speaker 0:
And then because of the increased cost of living, you're taking an increased level of income from that fund. And that's what's called sequencing risk. That's when you've had a drop in the value of the pot and you increase your income level and you're really damaging the income sustainability of the fund every time you do that. Now I think in this sort of spike inflation world, but we're gonna see shorter business cycles. And, as we know, recessions are associated with bear markets. If someone's retiring at 60 they might live, might live for 25 years.

Speaker 0:
They might have in that time four or five different bear markets. And if every time there's a bear market, they're cashing in at the lows, and especially if it's caused by inflation, they're cashing in more and more at the lows. It's not gonna work. So I think you've got to think about two different things here. One is that you've got to think about managing peak to trough losses.

Speaker 0:
So we have a fund called the Multi Asset Strategies Fund that does that. So when equity volatility is high, it shrinks the equity allocation. So last year, equities were down about 13% peak to drop off the way we measure them, gilts were down 25 this fund was down six. So you can be more defensive when you've you've got bear markets, so it's gonna become more and more important. Diversification on its own

Speaker 0:
won't be enough, and I don't think natural income levels are enough. Either people will have to touch their capital. Do you think advisors are well prepared for this because they've had 10, 15 years of a certain way of thinking for their clients, and now they're gonna have to change tax. I mean, no one's been really designing funds properly for this in in my view, because because bear markets and recessions have been so rare. The business cycles have been 10, 10 years plus, and so you can almost ignore bear markets or think you might get two if you're unlucky in your retirement.

Speaker 0:
But the more normal, lengthy business cycle is five years, and and people are living longer, you're gonna get a lot of bear markets. I also think there's a place for annuity. I probably shouldn't say that because it means money coming out of our funds. But now bond yields have risen. Annuities make a lot more sense than they did when, when bond yields were zero.

Speaker 0:
Um, at older ages in particular, I think, is good to good to get that security of income from an annuity.

Speaker 1:
Just on that point, I would like, I think, yeah, annuities definitely have a place, and it's good for retirees today that they've got more options. I think the benefits of staying invested for a long time and taking natural income is that the capital that you keep, which you forgo if you choose the annuity that's intact and hopefully it's growing at least in line with inflation. I mean, that's a pretty conservative estimate. So we're living longer. That's

Speaker 1:
but we've got fewer assets, and therefore they need to stretch out for a longer time. And in the UK market, I think it's really important that we do education on this piece.

Speaker 0:
What about inflation linked bonds? You have much of a view

Speaker 1:
on that. Well, interesting year. Last year you'd think inflation at 10 day index linked guilds. I'll go and hide in those. But we saw long dated, index linked guilts behaving like startups falling 50% last year is absolutely extraordinary, um in in the Sustainable Income fund. We actually benefited

Speaker 1:
last year from going off the beaten track in inflation linked bonds. So we own inflation rate bonds in Mexico, South Africa, Brazil. These held up really, really well last year. So having that flexibility to look around the world for inflation link linked income is really, really important to

Speaker 0:
us. It's the duration that killed them because, you know, if you're an inflation linked bond, a lot of your coupons are in the distance, particularly, inflation is high. You you don't get 100 back at the end, you get 100 plus inflation in 2030 years time,

Speaker 0:
a super long duration, and that interest rate shock just just killed them. The inflation protection was was dwarfed by this massive duration hit. So when we started the programme talking about outflows from cautious into more risky what do you think is gonna happen over the next year or two without asking to protect the crystal ball? Do you think we're going to see more into risk options or do you think this said we're going to see a move into cautious within that area?

Speaker 0:
Staying in that cautious And I would I would like to see a move into cautious, obviously specifically, I'd like to see a move into my cautious funds, but you know, we'll hope for that. But I think you probably will see that continue because a lot of people will be looking at the losses they made in that in those funds and thinking, we've got to make this up somehow, and we're not going to do that through bonds. So we're gonna try through equities now. That might turn out to be a sensible thing to do if you're prepared to wait for 10 years.

Speaker 0:
But if you're the sort of person who worries about six months or a year, it could also

Speaker 0:
be a nightmare. If you have an equity market sell off in that time. So what? What are people gonna do? I don't know. It depends. That's always my answer to what's gonna happen in the next year is it depends. It's a cop out, but it's It's the truth

Speaker 0:
and bringing up in your point earlier. You know, it's an over reaction, perhaps to how badly they did before. Now, going into the the riskier options. It's not the way to go, is it? Look, I think you should always be thinking about people's risk appetite over the longer run. But just you know, the the risk rating system isn't isn't at fault. But you've got to ask yourself how diversified are these funds and what are their strategies to deal with downside risk? And if you've got a fund that's only got two asset classes, global equities and long duration

Speaker 0:
bonds, you're particularly vulnerable to inflation shocks. So one of one of the, uh, big passive houses likes to show a scatter plot of US stock and bond returns. And you see 2022 is like this massive outlier where you lost loads of money in stocks and bonds. They've got 100 years of data and they're saying, Look, it will never happen again if you adjust those returns for inflation.

Speaker 0:
Suddenly there are loads of years when you you lose money in real terms in stocks and bonds simultaneously, and they're all times like the seventies, the late eighties 1994. They're inflation shocks. So you gotta make sure you've got a good diversification, I would say and stick to the stick to the risk level that suits the the customer's risk appetite. Tom, I'm conscious of time here. But if you could leave the the listeners with one or the viewers with one sort of thought, What's your view on the multi assets space and from the income side in particular?

Speaker 1:
Yeah. So I think when it comes to generating income for clients who need that multi asset approach, often those in retirement I think we not need to start thinking about how we're going to make these assets last longer.

Speaker 1:
And with our sustainable income strategy, the focus is firmly on natural income. So we expect our income grew by 5% last year. We expect it will grow by another 5% this year. We need solutions like this in this space to serve this sort of burgeoning UK retirement market of people that are living longer and need their assets to last longer.

Speaker 0:
So I'm gonna ask you the same point. I know you'd like people to buy your your funds, but if you could leave them with one sort of concluding thought, what would it be? Uh, I think it's just buy funds that are relevant to your client's risk profile. So again, I would just I would emphasise that, uh, but what we're trying to do is provide funds that do give that consistency that do what they said they would do. So, yeah, If you are looking around again, look for the funds that

Speaker 0:
did a good job for you last year because it's those one in 10 years not necessarily the nine in 10 years which are all, you know, fairly average. It's the outliers. As Trevor mentioned, you need to make sure that your manager is considering what can happen in those years because those are the years when you're going to get your clients phoning you up. Or potentially if they're really annoyed, leaving your firm and going to someone else.

Speaker 0:
Trevor Last but not least, yeah, well, well, I have this slightly controversial view that I think there's no such thing as passive in multi asset because, you know, the first question is, which asset classes do I include, and you can't do that passively. So So I think you should be active in terms of your asset class universe, including asset classes that can give you resilience to inflation risk. Return defensive characteristics. You should blend them in a dynamic way,

Speaker 0:
so it's not a not a fire and forget. At 60 40 you keep looking at valuations, make adjustments and then day to day management also, especially as the business cycles come and go. If we're going to see more bumps and lumps along the way, I think you need to be active on on all fronts. Well, Trevor Simon Tong, Thank you very much. Thank you. And thank you very much for watching