Apollo Asset Management is urging investors to rethink how they diversify their portfolios, and introduce a higher weighting in absolute return funds going forward.
After significant declines for bonds in 2022 and continued weakness in the equity market, Ian Willings, partner and fund manager at Apollo, said the days of the 60/40 portfolio and passive allocation are “challenged for the foreseeable future”.
Instead, he argued investors need to diverse their portfolios across multiple asset classes, and suggested a 60/20/20 split, with the last 20% being invested in absolute return funds.
“The asset class which produced positive overall returns last year was the basket of absolute return strategies, most importantly in a year where most asset classes fell,” he said. “We have always been truly multi asset and believe there was always a place for absolute return alongside the traditional asset classes.”
Willings said Apollo has always adopted a diverse approach to absolute return, combining 12-to-16 strategies and funds that the group believe provide the best opportunity to produce steady low risk and diversified returns.
“Going into 2023, we maintain an overweight portion and see added opportunity with higher interest rates for these strategies as the interest earned on the cash on the funds’ balance sheets will be higher than in previous years,” he said.
Describing the outlook for the year as “uncertain and complex”, Willings said Apollo is maintaining an underweight stance to equities, while despite adding to its fixed income exposure, he noted they remain underweight after a 2022 which saw huge drawdowns in value in the asset class.
“Within fixed income markets, we see pockets of value in the investment grade space,” he said. “While we believe inflation will be stickier than the market predicted, there is value in shorter duration assets, however, there are some risks to credit and higher yielding bonds should the recession be deeper than the market expects.”
As a result, he said in the fourth quarter of 2022, Apollo increased its weightings to fixed income, but overall, their preference remains to absolute return and alternative funds.
Despite being underweight in equities, he added the group remain confident there are still opportunities to make “good” money over the long term when focusing on structural trends such as ageing population, deglobalisation and energy transition.
“We continue to favour managers focused on value over growth, strong dividend companies and those with business models that can sustain a recession,” he said. “Two funds we are overweight in this space are Lightman Europe and Havelock Global.”
“As a further diversifier, we added gold at around $1,650 (£1,331, €1,513) per troy ounce via an ETF,” he added. “This was the first time we have invested in physical gold since 2012. We noted in the third and fourth quarters of 2022 positive trends in the level of central bank buying of gold as investors look to safe havens diversification away from US treasuries.”
In terms of real assets, including infrastructure and property, Willings expects 2023 to be a challenging environment.“We remain underweight and have concentrated our exposure within niche and specialist investment trusts that have either a level of inflation protection or income which is largely immune from a recession,” he said.