A top-down asset allocation is the best option for client portfolios in today’s market environment because the strategy can handle the influence of macro-level events, according to an expert panel speaking at the 2013 Morningstar Investment Conference in Toronto on Wednesday.
“Fifty or 60 years ago it was a lot easier to put a portfolio together where you could truly ignore [macro events] and not express it in a portfolio,” said Hal Ratner, chief investment officer, Europe, Morningstar Inc. However, in the past few years, equity markets have been primarily driven by macroeconomic activity.
A portfolio constructed with a top-down asset class strategy, however, can respond to large macro-level events, he said, such as interest rate changes.
Ratner also advocates this type of investment strategy because macro events effect personal consumption, which is often the goal for many retail client portfolios.
While there may have once been a time when this strategy was not as relevant, there are still many historical instances that portfolio managers can use as learning tools.
“This is not unprecedented,” said Scott Burns, director of fund research, Morningstar Inc. “If you look at history there are lots of time periods where macro-events really propelled what was happening in a portfolio.”
For example, in the mid to late 70s many aspects of the markets were being driven by inflation, he said, while more recently, portfolio managers have only to turn to Japan and its lost decade to look for examples.
To go with the top-down approach, multi-asset funds in particular work well in the current environment, suggested Christopher Davis, director of fund analysis, Morningstar Canada.
“[Multi-asset funds are] tremendously valuable tools,” he said. Davis believes they are so important because they “protect investors from themselves” by enforcing a level of discipline and making sure that clients stick with their asset allocation strategy.