Important Notice

The 1OAKFunds website is designed solely for Professional and Eligible Counterparties as defined by the Financial Conduct Authority and their professional advisers. To view the content you confirm that you have read and accept our Disclaimer. If you are not a Professional Client, Eligible Counterparty or professional adviser you should not proceed any further. In particular, the content of this website is for Professional Clients and Eligible Counterparties only and should not be relied upon by, or circulated, to Retail Investors.

Issued by 1OAK Capital Limited, authorised and regulated by the Financial Conduct Authority.  1OAK Capital Ltd (1OAK) (Registered in England & Wales Number: 06890293; FCA registration number 501453) provides fund management services for its customers. 1OAK Capital Limited is authorised and regulated by the Financial Conduct Authority. Registered Office of 50 Sloane Avenue London SW3 3DD.

The non-equity allocations of multi-asset portfolios are arguably the most contentious part of a portfolio.

The rapid re-start of many economies from shutdowns due to COVID is being stimulated further by unprecedented monetary and fiscal policy measures. This may be compounded further by the release of an involuntary build-up of private sector savings. Rapid economic growth is generally expected in many developed economies in 2021 and 2022. What is less certain is how central banks will react to the possibility of economic ‘over heating’ and resurgent inflation. Additionally, aggressive fiscal policies have come at a cost, with many governments set to realize debt to GDP ratios matched only in wartime periods. With a new paradigm in growth, inflation, and government balance sheets, will investors continue their willingness to buy debt after a four-decade bull market run..

The three Multi-Asset portfolios are all constructed cohesively, driven by an underlying understanding of the macro environment and individual assets' outlooks. However, they are also made for different investor preferences and are constructed in a holistic portfolio-oriented manner. With this in mind, each portfolio's non-equity sleeve serves a different function across MA40, 60, and 80. For MA40, the non-equity sleeve forms the portfolio’s core, and it needs to be diversified accordingly. It also needs to contribute significant returns and must select assets with that in mind. Conversely, MA80’s non-equity sleeve is meant to complement the predominately equity portfolio. As such, it adds the most value by providing diversification and downside protection in the event of an equity drawdown.

Non-equity allocation

The chart below shows the target non-equity allocation of the three 1OAK Multi-Asset Funds as of the 8th March 2021.

Non equity investment chart 1

The chart above shows that MA40 has a higher level of exposure across most non-equity assets. Allocation choices are more apparent if we look at the exposure to each asset class as a percentage of the funds’ non-equity allocation:

Non equity investment chart 1

This second chart shows how the non-equity allocation of the three funds differs. There are several areas where the allocation is notably different.

Portfolio Level

  • Corporate vs Government Debt – On aggregate, MA40 has a greater exposure to corporate debt. The non-equity sleeve forms the core of the MA40 portfolio, and moving out on the credit risk spectrum is necessary for achieving substantial returns. Corporate debt also contains a greater correlation to equities and is a less impactful diversifier in an equity-oriented portfolio; because this is not the case for MA40, it is less ‘costly’ to hold this position.
  • Low vs High Duration Assets - High duration assets are the most sensitive to falling rates, the most likely scenario in an economic downturn. As such, they are an essential component in an equity-oriented portfolio. That said, the MA40 portfolio can afford to ‘trade away’ this equity protection factor in favour of lower duration assets, which will fair better in a potential rising rate environment.

Relative to MA80 & 60, MA40 has more exposure to:

  • Nominal Gilts – This forms the core of a fixed income exposure. It has been primarily replaced in MA80 by inflation-protected securities and longer duration debt.
  • Short-Dated Gilts – Low volatility and duration can be seen as a cash plus asset.
  • Ultrashort GBP Credit – Another cash plus asset with low risk and low exposure to rising rates.
  • Rate Hedged US Corporate Bonds – This asset is well suited to take advantage of improving economic conditions while being shielded from rising rates.
  • MBS – An additional yielding fixed income asset that adds diversification to the MA40 portfolio.

Relative to MA80 & 60, MA40 has less exposure to:

  • Index-Linked Gilts and TIPS – Although these assets have an inflation-linked element, they are both exposed to rising rates due to their higher duration. They add a positive diversification element in a high equity portfolio, but this is less useful in MA40.
  • Long Dated US Treasuries – As above, long-dated treasuries act as a diversifying asset in the high equity content MA80 fund but are not needed when the equity exposure is lower. This asset is very vulnerable in an environment of rising rates and inflation, and as such, it is given a much lower weighting in MA40.
  • Gold & Property – These two alternative exposures are given the same allocation in all portfolios, so they represent a smaller percentage of non-equity assets in the MA40 portfolio.

This final chart illustrates the differences between MA40 and MA80.

Non equity investment chart 1

Conclusions

Blackrock have allocated the non-equity assets of all three portfolios in line with their expectation of higher inflation but lower increases in nominal yields and lower or negative real yields. They anticipate that central banks will be able to limit increases in nominal yields over the near to medium term. They also anticipate a sharp re-start post covid with positive equity market returns but expect G7 government bond returns to be very low.

Fundamentally, the differences in non-equity allocations between the lower risk MA40 portfolio and the higher risk/return MA80 portfolio reflect these assets' purposes in their respective portfolios. The higher duration assets in MA80 are primarily intended to offer diversification benefits. MA40 and MA60 don’t have the same need, and so exposure to longer duration fixed income is reduced.

Download Non Equity Allocation Across funds