Three ways to balance your portfolio

Investing was easy in the 2010s. At least it was with hindsight. When it came to equities, the US ruled supreme  – in particular the growthy tech stocks – and, with interest rates at rock bottom, bonds were best left untouched. Instead, income seekers looked to specialist areas like music royalties, property, and infrastructure.

Roll on the 2020s and the outlook is much less clear. Growth and value styles are playing ‘tag rally’, the UK stock market has so far matched the gains of the US, tech was on the slide until AI had its ‘iPhone moment’ and bonds look more attractive than they have done for decades – at least they do if interest rates are peaking. If interest rates continue to rise they too will make losses in the short term.

With inflation proving sticky, economic growth flat-lining and geopolitical risks still high, investors are understandably cautious and more than a little confused as to the direction of markets.

Spikeflation could become a thing

According to Royal London’s Trevor Greetham, the inflation ride is far from over. He says that while it may fall this year, a range of structural changes mean we will be prone to further spikes in inflation in the years ahead.

“We do not think we are heading back to the regime of low, stable inflation that persisted in the 30 years before the pandemic,” he said. “Instead, we anticipate a new regime of ‘spikeflation’, where inflation is high and volatile.

The trends he believes will cause this are the underinvestment in fossil fuel capacity as we transition to net zero, heightened geopolitical risk and a trend of deglobalisation, including onshoring to shorten supply chains, a deterioration of relations with China and Brexit.

“A new era of spikeflation has two important implications for investors,” he said. “Firstly, it underlines the importance of including inflation hedging assets like commodities and commercial property within a multi-asset portfolio to provide resilience against sharp and unexpected bursts of inflation. Secondly, investors should be prepared for much shorter boom-bust cycles, with recessions becoming much more frequent as central banks step in to bring inflation under control.”

Alec Cutler, manager of Orbis Global Balanced fund, agrees that inflation there are several trends that will keep inflation higher. He describes this with the analogy of a layer-cake in this podcast:

Three ways to balance your portfolio

All the uncertainties in the world point to a balance in portfolios. And, according to Max McKechnie, global market strategist at JPMorgan, there are three ways you can balance your portfolio. “You need balance between stocks and bonds, balance between equity regions and balance between equity styles,” he said.

Starting with equity styles, investors could combine global income funds with an eye on value like TM Redwheel Global Equity Income, with an out and out global growth fund like Scottish Mortgage Investment Trust. Alternatively, investors could look for a more style-neutral fund like Fidelity Global Special Situations or Lazard Global Equity Franchise.

When it comes to regions, investors could team a fund like Rathbone Global Opportunities – which only invests in developed markets – with a fund like GQG Partners Emerging Markets Equity. Alternatively investors could look at teaming regionally specific products like Matthews Pacific Tiger, Janus Henderson European Selected Opportunities, Baillie Gifford Japanese, AXA Framlington American Growth and Jupiter UK Special Situations.

And when it comes to bonds, investors could look at specific areas like corporate bonds and high yield bonds via funds such as M&G Corporate Bond and Man GLG High Yield Opportunities, or instead opt for a fund that can invest in all sorts of fixed income products like TwentyFour Dynamic Bond.

_{Photo by Katie Rainbow 🏳️‍🌈 on Unsplash}