Stand out & mitigate noise using multi-strategy investing
There is an adage on Wall Street that suggests, “So goes January, so goes the year “. Since 1950, this saying held true 87% of the time for U.S. Equities (Stock Trader’s Almanac). Although a negative January could foretell difficult times for the year ahead, this barometer has not really been as accurate as of late – in fact, during the past eight of the nine times January saw negative returns, the US market finished higher.
Let’s not forget however that U.S. markets are coming from a very strong year in 2021 (+29%) as the road to economic normalcy continued to lift equities despite the emergence of a new Covid variant by year end. For most of the past year, simulative fiscal policy and loose monetary conditions created a robust environment for stocks.
Going forward, the Federal Reserve is on track to raise interest rates in March, which might be even quicker than anticipated, given that inflation has been running far above policymakers’ target and labour market data suggests employees are in short supply.
Furthermore, the combination of excess savings and disrupted supply chains pushed inflation even higher with prices increasing by 7.5% in January, which was the largest year-over year increase since 1982. Whether inflation is temporary or persistent is still undetermined, but most likely depends on the end products input costs. Industries exposed to more commodity-driven inflation can adjust quickly once production and raw materials inventories recover. For service industries, the impacts of wage inflation may persist. Inflation also continues to be hot as tensions between Russia and the West are the highest as ever since the cold war with the U.S. citing heavy sanctions based on an imminent invasion of Ukraine.
Several companies on the S&P 500 index are also concerned about higher inflation. In fact, 73% of companies which already reported earnings have cited the term ‘inflation’ during their calls which is double from a year ago. Looking at the results, 77% have reported positive earnings per share surprise which is above the five-year average of 76% (FactSet). Notable announcement came from Facebook’s parent META which fell 26% in one day after disappointing earnings following a drop in daily users. The collapse in share price wiped out almost $240 billion from the social network's value which was the largest single-day drop in market value for a US company ever.
In 2022, if the pandemic’s hold on the world continues to ease, military tension in Eastern Europe de-escalates and earnings remain positive, a more synchronized recovery may develop. On the other hand, withdrawal of stimulus, mid-term elections which might delay infrastructure legislations, and continued supply chain bottlenecks is expected to lead to more volatility in the U.S. markets.
While the investment backdrop in 2022 isn’t looking perfectly rosy, it is in such markets that investors need to be on the ball as different events unfold. In such environment, picking the right fund manager might not be the easiest of tasks. A suitable way to mitigate the burden from all the noise coming from equity markets is by using multi-manager investment funds.
An equity multi-manager fund is a single fund which invests in several professionally managed funds. Rather than investing directly in shares, the fund invests in a selection of other funds. These funds are usually managed by several different managers each with different mandates. They’re designed to reduce the risk of picking up the wrong manager by spreading the selection of managers across different investment houses.
One of the key benefits of a multi-manager fund is the extra level of diversification this provides. Investors gain access to all the usual benefits of an actively managed fund, such as stock diversification and management expertise, with the added layer of diversification by fund manager. This is important because not all fund managers perform equally in all market conditions. By diversifying across fund managers, exposure to the performance of a single fund manager is reduced, thus volatility is diminished.
Multi-manager funds can also stand out by using a diverse multi-strategy concept. Style diversification in a multi-manager context refers to pairing different managers with distinct and clearly differentiated styles and thus diversifies the source of value-added relative to a single manager’s style. This can include value vs growth, small vs large cap, benchmark-driven vs unconstrained and others. The benefit here is that if one manager is out of favour, the other(s) may be in favour.
Apart from managed funds, a multi-strategy portfolio will also hold passive instruments like exchange traded funds (“ETF”). The benefit here is that the multi-manager approach can be tilted towards a particular theme or strategy based on the present economic cycle by blending the expertise of actively managed funds with sector specific or thematic ETFs.
As complexities and market events keep on putting pressure for investments to deliver, a combination of multi-manager, multi-strategy approach should provide the necessary re-assurance to deliver an acceptable return in the US markets whilst mitigating risks.
Christian Buhagiar, ASCI is a portfolio manager at BOV Asset Management Limited.
The writer and the company have obtained the information contained in this document from sources they believe to be reliable but they have not independently verified the information contained herein and therefore its accuracy cannot be guaranteed. The writer and the Company make no guarantees, representations or warranties and accept no responsibility or liability as to the accuracy or completeness of the information contained in this document. They have no obligation to update, modify or amend this article or to otherwise notify a reader thereof in the event that any matter stated therein, or any opinion, projection, forecast or estimate set for the herein changes or subsequently becomes inaccurate.