“Anonymous rating” is an intriguing phrase that comes up in the first few minutes of my interview with James Klempster, deputy director of multi-asset at Liontrust. This is a process where team members individually assess asset classes prior to their quarterly tactical asset allocation meeting.
Each asset class is assigned a rating from one to five, with five being the most positive rating. This is done by looking beyond the immediate geopolitical and economic noise and focusing on 12-18 months.
Prior to joining Liontrust in February 2021, this was not something Klempster had encountered before. “The goal is to get rid of the shackles that anchor you to previous decisions or recommendations.”
The 10-person multi-asset team then uses their insights, in conjunction with a whole host of quantitative information, to debate and determine what is the appropriate overall rating for each asset class. These scores, in turn, inform changes to Liontrust’s portfolio and fund ranges.
The diversity of opinions depends on the asset class in question and your position in the cycle, Klempster explains. “Sometimes you’ll find a pretty tight grouping, and other times you’ll find a big spread.”
He says it may be down to personal interpretation, which is why anonymous scores are only part of the process.
The collaborative team approach was one of the factors that helped turn Klempster away from Momentum Global Investment Management, where he had worked for 14 years.
“I’d had a great run at Momentum,” he says, “but the opportunity to join Liontrust is a call that’s too hard to resist. It’s an amazing company that’s really top notch. I have known and respected a number of people here, including [head of multi-asset] John Husselbee, for a very long time.
This familiarity also helped make his transition, a year into the pandemic, much easier. “The focus is on the team. We want to have a team approach to managing money. We believe in diversity of viewpoints, that diversification is at the heart of what multi-asset investing requires. Logically, it makes sense to have a whole host of different viewpoints and inputs into the process. »
Seeking a variety of internal viewpoints is one thing, but the Liontrust team takes it a step further and hires an independent consultant to challenge their thinking and conclusions, making sure they stand up to scrutiny. ‘exam.
“We don’t want to fall into the trap of groupthink and toe the party line. I think that’s a big check and balance that we have in the process,” Klempster says. The latest tactical asset allocation meeting only resulted in two changes: Japanese equities and convertibles were downgraded from four to three.
“Within convertibles, we are taking some profits after a strong period of performance for the asset class, which we believe has potentially reached a cycle high,” the Tactical Asset Allocation update reads. (TAA) for the fourth quarter of 2021.
He adds: “When it comes to Japan, our conviction has dropped slightly, although the recent political upheaval appears to be resolved with new Prime Minister Fumio Kishida in place.” For now, we prefer to spend our equity risk in regions such as Europe and the UK.
Nothing is rated five out of five; while, unsurprisingly, silver marks one. The overall rating is four out of five.
Klempster says, “A year ago, we scored a five out of five as we sat in the foothills of the bottom stimulus trade. As the markets went up, with all those Covid restrictions unraveling, we tempered that. We are still positive about the general environment.
The fourth quarter TAA update was “pretty quiet,” Klempster says, but that was because the three months leading up to the meeting had “pretty much been a continuation of what happened during the summer”, which saw some changes in the TAA.
The next step in the process is where an artistic element of asset allocation comes into play, namely portfolio construction.
Applying these reviewed opinions and scores to funds and portfolios is a relatively simple task in some cases, while others require more tweaking. This may be for mandate reasons or because they are passive or mixed strategies, says Klempster.
“You have to strike that balance between wanting to express your views on portfolio funds but, at the same time, not wanting to over-trade and hesitate. It is a question of implementing it in a sensitive way.
Alongside asset allocation discussions is manager selection, which brings Klempster back to the importance of the team: “There’s a lot going on behind the scenes. A colossal job. »
Given the sheer volume of factors at play, cutting out the immediate noise and basing asset allocation opinions on what the environment should look like 12-18 months from now is no small feat.
At the time of the interview in late January, we had growing tensions between the West and Russia, Covid-19, questions about the British Prime Minister falling to his sword and flattering approval ratings for US President Joe Biden. And we can’t overlook the topic that has dominated most conversations about financial services in recent months: inflation.
Klempster says with a wry chuckle that “we’re really extending the definition of transient at this point.”
“The short-term consensus is that inflation will stay a bit higher than what we are used to, but in the medium to long term it will return to some sort of normal level. Whether it starts with a two or a three is the debate that most people have.
Inflation at 2-3% is a “reasonably favorable environment for consumers and markets, obviously with the exception of the fixed income sector, which may find it a little more challenging.”
“The central theme we drive in the portfolios is a continuation of the reflation trade, which can trace its origins back to November 9, 2020 when we had the first Pfizer vaccine trial.”
According to Klempster, the opening of economies and the growing number of people who are doubly or triple vaccinated create a different dynamic. “It’s a testament to interest rates rising, service usage increasing, activity becoming less remote. For us, there are three main directions that came out of it.
“The first is that in a reflationary environment, developed markets in the rest of the world should do better than the United States. This is an opinion that we have been expressing for a year and a half. We think value should benefit more than growth stocks. Generally, they should be better positioned to weather slightly higher prevailing interest rates and a slightly steeper yield curve.
“And, finally, small caps should do better than large caps. More people are on the move, consuming more, and when national economies are doing well, you tend to find that small-cap stocks do too. These are the three factors we consider when thinking about reflation trading and how we position ourselves in our funds and portfolios.
But it’s not about making “bulk binary bets,” says Klempster. “It’s about favoring small caps over large caps, or value over growth.”
under a cloud
He describes China as “a concern”, adding that struggling real estate giant Evergrande “really spooked investors last year”.
“Generally it continues to grow relatively well, which is why we want to stay diversified and avoid having any particular dominant force in our portfolios.
“Similarly, in terms of geopolitics, it is difficult to predict what the impacts will be. Even if you anticipate the risk, it does not always necessarily mean that you will get a certain response from the asset classes.
As for the UK, Klempster describes it as “having been under a cloud since the Brexit decision in 2016”.
“It doesn’t really seem to have captured the imagination of investors outside the UK for this period. You can point to its sector composition and say it’s outdated, and there are a lot of markets here that don’t compare well from an ESG perspective and that’s why it’s not liked.
“But at the end of the day, all of this led to the UK being extremely cheap from a value point of view. As investors, we all appreciate different points of view and take them into consideration. But it is, by far, the cheapest major stock market.
“It’s something we’re pretty constructive on, overall. We believe there are good opportunities in the UK. On a share-by-share basis, you can probably justify some of these valuations, but if you look at the index as a whole, it looks quite attractive.
“By investing on a diversified basis and using different managers wherever you can, we believe this is a decent home for capital.”
Place your bets
Rather than having a fixed view on, for example, geopolitical developments; Liontrust’s multi-asset team strives to avoid being too sensitive to any one factor, which feeds into the topic of risk nicely.
Away from inflation, politics and the broader macroeconomic environment, risk has been another key topic of conversation in the industry.
One philosophy that has filtered through from the head of multi-asset Husselbee is to “win in the long run by not losing.”
“We want to minimize any downside sensitivity as much as possible, as it makes it easier for investors to navigate. This approach begins with the suitability discussions and continues into strategic asset allocation,” says Klempster.
Liontrust funds and portfolios are “deliberately constructed to try to target a particular level of risk and fall within a particular risk bucket”.
“From there, when you consider moving a fund or portfolio tactically, the first thought is ‘will it still fit?’ Then it’s about minimizing downside sensitivity while keeping the right level of risk.
After scoring the overall outlook at four out of five, Klempster and the team head into 2022 with optimism.
“We are constructive on equities, we think the global economy is still doing well, there is still a lot of activity. The corporate sector appears to be in fairly good shape. Individuals still have plenty of savings built up throughout the current crisis, which speaks to the outlook for inflation.
“The counterweight to that is the inflation argument. Overall, we think we’re still in the growth phase of the cycle, but more mid-cycle rather than early in the acceleration period. We still believe in owning stocks, but realize that these double-digit returns don’t happen every year.”
He saw that the past 12 months have been “relatively mild, despite a number of surprises thrown into the market”.
He adds: “But we must be aware that the speed of the market recovery, from the low on March 23, 2020, is unusual.
“To expect this to continue unabashedly is probably hoping too much.”