“Floating rate instruments however offer both capital and rising income streams to match the move in the market. Just one example of how different vehicles in the same asset class will react differently at different points in the cycle.”
Indeed, in 2022, an investment approach considered high risk was low risk due to rising interest rates and high levels of inflation that disproportionately affected fixed interest investments – an asset class traditionally deemed low risk.
This is where the acronym ‘Tina’ or ‘there is no alternative’ came into play, in the sense that if you wanted to see investment returns you needed to be invested in equities even though their performances were at times lacklustre and their future prospects were relatively anaemic.
This created an artificial buffer to equity investments, says Vanessa Eve, investment manager at Quilter Cheviot, as individuals bought into and retained these investments over other asset classes.
"However, given the dramatic falls in the prices of fixed interest investments, as well as the interest now available on cash and within money market funds, there are now options for investors to achieve returns without necessarily taking on board higher levels of risk."
To get the right kind of diversification while balancing risk in a multi-asset portfolio in volatile time, Eve says we need to go back to the first principles of investing: time in the market rather than timing the market.
This is because multi-asset portfolios that are properly diversified historically have provided positive returns alongside mitigating short-term volatility.
She adds: “This will be punctuated by periods of dislocation, such as what we saw last year where low risk assets, such as gilts and US treasuries, massively underperformed higher risk assets such as equity investments.
“However, we need to remember that 2022 was dominated by the war in Ukraine and the measures taken by central banks to tackle inflation.
“The impact of these events is now factored into the prices of various different asset classes and as such a blend of fixed interest, equity and alternative investments will still provide steadier performances over the long term rather than taking large bets on any one asset class.”
Eve points to the example of the company Nvidia, which is a dominant supplier of artificial intelligence hardware and software, and along with just half a dozen other names has accounted for almost all of the 12 per cent return for US benchmarks in 2023.
Eve says while this is a positive for those with solid positions in these company names, we need to remember that these same stocks saw significant falls in 2022 as high levels of inflation severely impacted the technology sectors.
