Strong performance from equities this year has meant some UK multi-asset portfolios have now recovered the ground lost in the 2022 bear market.
It is not the case across the board though, with only the more equity-leaning 60-80% equity and 80%-plus equity Morningstar categories having fully recovered their 2022 losses, as of the end of May 2024.
Least successful has been the GBP flexible allocation category. Morningstar’s analysts said that despite its ‘nimbler mandates’—the strength of equity markets in 2023 meant they could not keep pace.
All GBP allocation categories, from the most conservative to the most aggressive, lost around 9-10% in 2022, owing to simultaneous falls in bonds and equities. The magnitude of losses in bonds, and the failure of diversification, was a ‘particular shock’ for investors in ostensibly conservative allocation portfolios, Morningstar said.
See also: Adviser exodus looms with half planning to retire in the next five years
Morningstar analysts said that in a ‘slightly longer-term context’, underlying the strong performance of global equities has been a series of shifts in market leadership between value and growth stocks. Growth equities outperformed value by an annualised 2.3%, although it has been far from a smooth path for the growth style.
The pandemic and subsequent reopening of economies, Russian invasion of Ukraine followed by rising inflation and interest rates, and finally the artificial intelligence-driven rally in 2023, meant that each style has had extreme spells in and out of favour, Morningstar noted.
This style rotation has been ‘a challenge for multi-asset funds taking an active approach’. This was compounded by the narrow equity market leadership in 2023, making it difficult for managers to fully capture the market return.
See also: Tatton, Quilter and Timeline on track to dominate MPS market
On the fixed income side, Morningstar’s analysts noted that bond positioning has also been pivotal to multi-asset funds.
The composition of holdings has also had a major influence on performance since the beginning of 2022 as interest rates rose sharply, and the longest duration, most rate-sensitive areas such as UK inflation-linked bonds and UK gilts, saw extremely large losses.
Meanwhile the less rate-sensitive high-yield sector saw a more modest fall while also benefiting from economic recovery later in the year. A strengthening economic backdrop in 2023 helped sterling high-yield bonds achieve a return of 16.2%, which was even higher than global equities’ 15.3%.
