AMP Capital Multi-Asset Fund (AMP1685AU) Report & Performance

In continued difficult market conditions, the Fund was negative for the quarter. While any negative return is unwelcome, in the current market context, the results for the quarter and the last year, do demonstrate resilience. In international equities, the Fund’s three core managers have outperformed the market collectively by around 7% over one year, while its two Australian equity strategies have outperformed by approximately 2.5% collectively, over the same timeframe. Both however slightly underperformed over the last quarter. In fixed income, Australian bond exposure offset by a short US bond exposure benefited performance, as the unusually wide gap between the two markets closed aggressively. In alternatives, the Fund’s new Liquid Alternatives strategy pleasingly returned approximately 5% for the quarter.

After a rally early in the quarter, the Fund switched further exposure from bonds and equities to alternatives. Changes were focused on global shares, with additional reductions in real assets and emerging market equities. We also made further reductions in Australian bonds and moved to an offsetting short position in the US. At quarter’s end, the Fund was marginally lower than average in weighting to Australian shares, and lower again across international share markets, with a sector bias toward value and energy.

We remain very light in property, at less than 2%, and have reduced exposure to infrastructure early in the quarter to below 4%. In regard to fixed income, markets have been decimated this year, mostly arising from interest rate increases, rather than credit stress (so far). Prospective bond returns are looking increasingly attractive and as the peak in rate hikes approaches, we believe a buying opportunity is emerging.

The Fund produced a small negative return in August amid significant market volatility and a renewed march higher in global interest rates. Global equity markets fell over 3.5%, whilst global bonds fell close to 2%. Australia fared relatively better, with a rise in the local equity market of over 1%, however government bonds also fell almost 3%. The sell offs were induced by a marked increase in hawkishness from the world’s central banks, notably on the back of speeches at the Jackson Hole central bank symposium, where Fed Chair Jerome Powell gave a hawkish speech conveying a clear resolve to fight inflation with further rate hikes. Economic data releases in the US were mostly soft and reflect increasing risk of recession.

The Fund fell in the June quarter amid broadly falling markets, though performed relatively well considering the size of these market falls. Major global bond and equity markets haven experienced their worst first half in over 50 years as central banks have rapidly tightened policy to combat inflation, and in doing stoked fears of triggering a recession. Global equities have fallen over 18% year-to-date, global bond indices have fallen circa 10% and listed real estate over 20%. In contrast, energy and infrastructure-related assets have held up relatively well, although commodities also retraced very sharply in June as recession fears increased. Hedges and cash in the Fund aided the return, with positive contributions seen from stock selection, infrastructure, and alternatives.

The Fund fell slightly in May as broader global markets continued to deteriorate. Global equities have, in some cases, corrected beyond 20% from recent peaks, while some bond markets are down by similar amounts. Bond market corrections of this size have not been seen for over 40 years. The Fund’s relatively low recent losses have been a result of asset allocation leaning toward cash, real assets and alternatives; stock selection from our core managers; and tail hedges, which will likely continue to aid the Fund’s performance if markets fall further. Our hedges in credit and equities have been performing strongly, with some profits being taken from credit in May.

We believe the current environment is very attractive We believe the current environment is very attractive for actively managed funds. After recent falls, lower valuations will likely be setting up stronger longer-term returns. The uncertainty is how much damage is encountered in bringing inflation under control in the meantime. Economic growth expectations are slowing sharply, as central banks prioritise inflation-control over employment. While markets have started pricing a recession, earnings remain solid (for now) and US consumers are still spending. If inflation softens over the next six months there is room for a soft landing in the US and a likely great buying opportunity. If inflation remains higher for longer, we believe the probability of a recession will rise above 50%. We expect market volatility to remain higher and market direction to remain sideways at best over the next six months. Conditions favour defensives and energy sectors in equities. Despite confidence in commodities, especially oil and some metals, we have now taken some profits in these areas as they are quite susceptible to rising volatility.

Performance and positioning The Fund fell slightly in April, though held up well within the context of sizeable falls in mainstream markets. The US market led the way, falling over 8% over the month, while emerging markets fell by over 5%. Government bonds also fell, losing 1.5% in Australia and almost 3% globally. The Fund meanwhile benefited from areas of the portfolio that are the most differentiated from more mainstream diversified funds. Positive contributors included profits from our tail hedges in US equities and US high yield bonds. Alternative strategies also lifted returns, while stock selection again added significant value.

The Fund fell slightly in the March quarter; however, performance was resilient in a market where International Equities and Bonds both lost significant value. The fund benefited from investments in areas such as Latin America and also Australia. Markets continued to be heavily impacted by rising inflation and rapidly shifting central bank policy, especially from the US. The US Federal Reserve (Fed) raised rates by 0.25% late in the quarter, with a further 8 hikes priced over 2022. It also signalled a much faster unwind of bond holdings (‘quantitative tightening’ or ‘QT’) than originally expected.

Looking ahead, we expect economic growth to remain positive but to slow, as the impact of higher prices, costs, and interest rates ripple through economies. Alongside the high level of geopolitical shocks and lack of the safety valves (e.g. monetary policy), we expect the elevated volatility to continue. The potential for a ‘policy mistake’ has risen, but our base case remains that inflation is likely to retreat somewhat over the next 12 months and that growth can maintain some of its momentum. There are elevated risks around this view however. At present there remain many areas of attraction in markets, especially those around commodity markets and the decarbonisation process. We expect these, plus the additional volatility, to continue to present opportunities