Portfolio positioning - resilient through the crisis

Positioning for a slower recovery

Coming into the year with a good exposure to more defensive asset classes helped us in the first half of 2020. We had slightly more cash than usual and, where appropriate, significant allocations to gold. Both helped partially protect portfolios during the sell-off and allowed us to add to equity positions in March and April.

Global equity markets have rebounded by over a third since then. And while the outlook has improved since March, there is now a risk that investors are perhaps too optimistic about the pace of recovery. If activity does not pick up as quickly as expected, we could see a return to higher levels of volatility. We have not made significant changes to our asset allocation, although we have taken the opportunity to strengthen the defensive spine of our portfolios. We are prepared for a more challenging environment.

Within multi-asset portfolios, we have increased the defensiveness of our fixed income holdings by reducing our inflation-linked exposure in favour of conventional bonds. The latter tend to exhibit a more negative correlation to global stock markets and should better protect portfolios in the event of a further stock market sell-off. We also maintain significant exposure to gold, which has historically tended to perform well during equity market downturns and in periods of low real (after inflation) interest rates.

Managing risk in our equity exposure

Given our expectation that the global economy will in time recover from the shock of the pandemic, we are maintaining our equity weighting within portfolios at current levels. However, we have taken some steps to modestly reduce the risk profile of our holdings and tilt it towards sectors that are better positioned in the current environment.

Tech and healthcare fell less and bounced harder

Performance of MSCI World Index vs MSCI Technology and Healthcare sectors in 2020, rebased to 100


Source: Refinitiv Datastream, 6 June 2020. Past performance is not a guide to future performance

One area of concern is corporate leverage. It could be some time before the global economy is operating normally again and companies that borrowed heavily before the pandemic may find themselves with unsustainable balance sheets. In this environment, we have a focus on companies that are appropriately financed. As a result, our portfolios demonstrate a lower level of indebtedness than their benchmark.

A new theme we have introduced to portfolios during the quarter is infrastructure stocks. These companies’ earnings are often based on long-term contracts that are less economically sensitive and have an element of inflation protection. We believe they are currently attractively valued on an absolute and relative basis. They may also benefit from fiscal stimulus spending designed to help economies recover from the pandemic.

Finally, we continue to invest in themes, such as technology and healthcare, that offer long-term growth potential. This currently tilts portfolios more in favour of “growth” over “value” companies. We think this remains appropriate. In a very uncertain economic environment, companies that can offer some certainty of growth are likely to remain in high demand. While growth has outperformed value consistently for much of the past decade, we think Covid-19 could prolong the trend even further.

Important Information: This communication is marketing material. The views and opinions contained herein are those of the author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results. The value of an investment can go down as well as up and is not guaranteed. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. Regions/ sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this material include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change.  The content is issued by Schroder Investment Management Limited, 1 London Wall Place, London EC2Y 5AU. Registered No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.

Contact Schroders Wealth Management

To discuss your wealth management requirements, or to find out more about our services and how we can help you, please contact:

Marc Brodard

Marc Brodard

Head of Private Clients - Switzerland