Perspective - Managers' views

“Sell in May and go away” still hold true in this late cycle?

Rather than “sell in May and go away”, I go by the rules of staying flexible, be sensitive to valuations and maintaining liquidity.


Stephen Kwa

Head of Product, Australia

Rather than “sell in May and go away”, I go by the rules of staying flexible, be sensitive to valuations and maintaining liquidity.

Why flexibility matters?

Many multi-asset funds employ a fixed strategic asset allocation that is not responsive to changes in market conditions.   An example of this would be a simple balanced fund that might allocate 50% to stocks and 50% to bonds regardless of whether these assets were expensive or cheap.

Asset allocation is typically the most important driver of an investor’s total return, and we find having the flexibility to allocate between equities and bonds unrestrictedly based on changes in market conditions being key. 

As an objective-based total return strategy investor, I start with the objective in mind rather than some arbitrary benchmark index or fixed strategic asset allocation. The asset allocation is adjusted flexibly in order to achieve more stable returns above cash than would be possible otherwise.

Be sensitive to valuations

I define risk as the probability of loss and use this as our primary measure of risk. It is a forward-looking measure that is sensitive to valuations. When assets are expensive, they have a high probability of loss whereas when they are cheap, they would be likely to have a low probability of loss. We seek to control the probability of loss primarily through avoiding those assets that are expensive and at high risk of drawdown.

Investors should not be too complacent in the current late cycle of the economy, and need to be mindful that equity and credit markets are expensive and vulnerable to drawdown.

Recessionary wind blows

Resetting of central bank policy and a potential increase in inflation caused by rising wages and oil prices are a few of the major risks we see now.  While we do not expect a US recession this year, we are of the view that it could happen in 2020 based on the indicators we look at. 

We are using call options on equity markets as an effective way to benefit from a continued improvement in business confidence and equity market performance while minimising the damage to portfolios from another bout of equity market weakness.

Treasure the value of liquidity

We expect more market volatility in the short run.   It would be wise to defensively position the investment portfolio in order to protect capital and minimise drawdown. I see the benefit of holding a significant amount of liquid assets which provides the ability to move quickly and capitalise on market corrections when they occur.   As such, we believe liquid and defensive asset classes like short term US Treasury securities and high-quality investment grade credit will be key performance drivers from a total return perspective.


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