The USD B share class of the 1OAK Multi-Asset UCITS returned 3.2% for April. The month was defined by a significant reversal of trends present earlier in the year. 10-year US Treasury yields fell from 1.7% at the end of March to 1.6% by the end of April. Equity markets increased, and “growth” outperformed “value”, reflecting a reversal of the reflation trade. This pattern was also present across geographic equity markets.
All of the fund's asset class allocations generated positive returns, with Equities leading the performance. In addition, The FX hedging strategy helped to mitigate the effect of the appreciation of GBP.
The funds best-performing holdings all benefited from the positive environment for risk assets. Developed Market Property performed strongly and was up 6.04% on the month, followed by US Equites (4.43%) and Canadian Equities (4.95%), which both have a relatively large exposure to high growth companies.
The portfolio’s laggards included its fixed income components and some of the equity markets, which took a breather after exceptional year to date performance. Japanese equities (-1.39%) suffered from a trend reversal this month but are still up on the year. Aggregate Investment Grade US Fixed Income ended the month up 0.58%, recovering some of its selloff in the first quarter. Finally, Index Linked Gilts (0.73%) are in positive territory, benefiting from rising inflation expectations and reducing rates.
Macro Market Backdrop
The driving forces behind much of this year’s market trends have been shifts in expected levels of interest rates and inflation. Figure 1 below shows the interest rates for US Treasury across maturities. While interest rates are at historically low levels, the increase in rates since the autumn of 2020 has caused the value of all UST maturities to fall through 2021.
Figure 1; US Treasury Yields
Below is the US 10 Year interest rate for 2021. UST yields fell slightly through April (the orange part of the line in Figure 2 below is the performance through April). As a result, values have increased over the month.
Figure 2: US Treasury 10-year yields in 2021
Inflation has become the focus of many investors’ attention. Expected inflation has increased dramatically. The break-even rate between nominal 10-year and inflation-protected Treasury securities has increased to a level not realized in over a decade. Increased inflationary break-even levels mean that the implied real yield on 10-year treasuries has been driven down further into negative territory. Blackrock have noted that nominal yields have not increased by as much as would normally have been the case with the increase in break-even inflation rates that we have seen. They expect that central banks will lean against any significant increase in nominal yields, so real yields are expected to remain low/negative.
Figure 3: 10 year nominal US Treasury rates and US break-even inflation rates
Figure 4 and 5 below look at the implied, real rate and break-even inflation rate for 10-year UST in more detail. In April, 10-year nominal rates fell, while break-even inflation rates pushed upward. The net effect has been that real rates have become more negative for that maturity.
Figure 4: 10-year implied real UST rate
Figure 5: 10-year US Breakeven Inflation rate in 2021
Another critical narrative present since the new year has been the ‘tug of war’ between growth and value factors, driving dispersion within the equity markets. It is important to contextualize this by looking at the performance of the two measures over the past decade. Figure 6 below shows the MSCI World Value Index and MSCI World Growth Index performances since the beginning of 2010. Growth has outperformed value in this period. The growth index has increased at more than two times the growth of the value index over this period. Moreover, an environment of persistently low inflation and lowering interest rate and low growth expectations meant that ‘high duration’, high growth names, were supported increasing valuations by investors.
Figure 6: Value and Growth performance
Increasing growth and inflation expectations from the Autumn of 2020 into 2021 has meant that the post-global financial crisis dominance of growth has been challenged. As a result, from mid-Feb into March, value strongly outperformed growth, as the ‘reflation’ trade gained steam. However, the shift towards value ‘reset’ itself somewhat in April, with value equities lagging behind their growth counterparts.
Figure 7: Value and growth in 2021
The asset allocation from BlackRock positioned the Multi-Asset portfolios to handle the changing dynamics in inflation expectations and interest rates this year. Across the Multi-Asset funds, the non-equity allocation is oriented toward inflation-protected and lower duration securities. BlackRock maintains a positive outlook for risk assets and forecasts an upward trajectory for the global economy. With this in mind, the portfolios remain fully invested in equities. Going forward, market participants will continue to watch gauges of inflation pressures and for signs of ‘over heating’ in the US economy in particular. Additionally, while vaccination campaigns in the US and UK are progressing well (with Europe lagging), there remains a danger new COVID variants may develop and threaten those economies.