Sunil Krishnan, Head of Multi-asset Funds at Aviva Investors
RISK – WHERE ARE TODAY’S 'SAFE HAVENS'?
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n normal market conditions, fund managers look to construct portfolios able to navigate the range of outcomes that might reasonably be expected. There are typically three options to manage risk:
1. Increase allocations to government bonds; 2. Reduce investments in growth-sensitive assets, such as equities or high-yield credit; 3. Look for assets in demand when portfolios shrink (including currencies like the US dollar or Japanese yen).
Government bonds Government bonds tend to increase in value when economic weakness causes central banks to drive down interest rates on cash and form an important building block in many portfolios. We came into 2020 with some concerns about them being very popular, and therefore highly valued. Initially, this did not stop them performing their usual risk-off role as equities lost ground in February. However, by the second week of March, all bonds began to behave unusually. Government bonds are normally one of the most liquid markets, but it transpired that many bondholders had borrowed to buy them. As uncertainty increased, they were forced to sell both bonds and equities which created
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an opportunity to buy unwanted Treasuries. Nevertheless, market moves in March illustrate the need for a multi-faceted approach rather than a single source of protection.
Growth assets It can be tempting to rely on large sales of equities when trouble arises, as a strategy for protecting wealth. However, this is hard to achieve. First, by the time the headlines turn gloomy, a sale is often too late. Second, timing a re-entry to growth assets can be a huge challenge. We prefer to take a more strategic approach. In our uncorrelated allocation, we look for assets that can deliver strong returns but preserve capital in difficult times.
Currency behaviour The US dollar and Japanese yen are traditional safe havens, perhaps because they are often borrowed by companies and investors during good times. Our own analysis leads us to believe that strategically allowing a degree of unhedged exposure to these currencies may improve overall risk adjusted returns. Running in to 2020, the US dollar had been very strong,' in large part driven by the US economy’s domestic strength which insulates it somewhat from global trade and manufacturing woes. In contrast, the Japanese yen had been
