The era of cheap money is over. In this new world, we believe multi-asset portfolios need to be reimagined to embrace flexibility, allocate capital more efficiently, and better embed diversification through broader risk management. Mitesh Sheth, Multi-Asset Chief Investment Officer, explores the reasons why we believe now is the time to consider liquid alternatives.
We have come to define the period that followed the 2008 global financial crisis and continued until the Covid pandemic in 2020 as the era of quantitative easing (QE) – a period in which financial markets were buoyed by ultra-low nominal interest rates and central-bank asset purchases. Investors benefited from net long positions in almost any risk asset as QE lifted all boats. That tide has now receded and threatens to expose weaknesses in portfolios.
During the QE period, many asset owners chose to switch into passive equities, as well as opting for buy-and-maintain credit strategies. Furthermore, many increased their allocation to more illiquid assets such as infrastructure, real estate and private equity, seeking diversification benefits and the potential for higher returns than those delivered by traditional markets.
On the whole, this strategic asset allocation worked well for many investors over this period. However, since the world began to emerge from the pandemic, it has become clear that we are in a very different market regime from the one that drove the success of that approach.
As QE came to an end, the combination of unprecedented fiscal and monetary stimulus in response to the pandemic led to high and persistent inflation, and central banks then aggressively raised interest rates as they sought to contain it. While inflation has declined from its 2022 peak, structural factors such as high fiscal deficits, ageing workforces and geopolitical fragmentation increase the risk it will stay high relative to the QE era, potentially limiting the flexibility of central banks. In addition, the growing realisation that our planet is facing some significant biophysical constraints means that whatever growth we experience over the next few decades is likely to be shaped in part by those limits. All things considered, financial-market participants could now face higher volatility and shorter business cycles than they have become accustomed to.
A liquid alternative
For many asset owners, this very different regime is leading to an urgent review of their investment approach and different market conditions warrant a different approach. In this context, we believe that liquid diversifiers could provide investors with a significant opportunity. Liquid and flexible alternative strategies offer the potential for uncorrelated returns and downside risk management, without the high fees and additional risks associated with alternative vehicles.
In a world that is less connected and less stable geopolitically, and delivering greater dispersion of financial-market returns across and within asset classes, we believe that liquid, long/short global approaches should start to perform well. They take idiosyncratic risks and offer the prospect of diversification benefits that may be underrepresented in clients' portfolios today.
As asset owners have expanded their target allocation to diversifiers and alternative investments, investing in market-neutral, multi-strategy solutions can allow them to gain efficient access to these varied and liquid approaches in a way that we think will be valuable in the new market regime.
Author
Mitesh Sheth, FIA, MBE - Multi-Asset Chief Investment Officer, Newton Investment Management
Mitesh has oversight of Newton's multi-asset and fixed-income teams based in London, as well as Newton's quantitative multi-asset solutions team in San Francisco.
Prior to joining Newton in 2022, Mitesh was CEO at Redington, one of the UK's fastest growing investment consultancies, for nearly six years, having initially joined as Director of Strategy in 2013. He worked at Henderson Global Investors from 2005 to 2012, where he was Head of Fixed Income and later Director of Business Innovation. Mitesh started his career as an investment consultant, specialising in fixed-income fund manager research at Aon and WTW.
He is a Fellow of the Institute of Actuaries (FIA), having qualified in 2003. Mitesh graduated from the London School of Economics (LSE) in 1999 with a BSc in Actuarial Science. After graduating, Mitesh spent a year in Thane, India studying at Tatvagnan Vidhyapeeth (School of Philosophy).
Mitesh was recognised in HRH The Queen's New Year's Honours list in 2022 as a Member of the British Empire (MBE) for his services to leadership in diversity and inclusion. Outside of work, other than spending time with his wife and three teenagers, Mitesh spends much of his free time volunteering with a number of UK and India-based charities.
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