Royal London’s multi asset funds lagged behind simple balanced funds in the deflationary first act of the Covid-19 shock given an unexpectedly strong performance from gilts. We believe our broader asset mix will put us in good stead in what could be a more inflationary second act. Policy is extremely loose, as the surge in gold testifies, and central banks have no plans to tighten until the virus has gone. We are moderately overweight equities and commodities with a large position in high yield bonds. Immunity levels are low and a relapse is possible but we would ultimately buy dips in the expectation of further stimulus.

Markets hint at inflationary future

We set the strategic asset allocation for our Governed Range and GMAP funds in order to maximise long-run returns after inflation. We don’t have a high allocation to long-dated gilts so we were disappointed rather than surprised that they lagged behind simple balanced funds in the deflationary onset of the coronavirus crisis. The surge in the dollar gold price since March suggests a more inflationary outlook in which broader diversification is likely to pay off. Policy-makers would rather err on the side of doing too much stimulus rather than too little.

The Investment Clock and the ‘square root economy’

The Investment Clock slumped into reflation in Q1 when growth and inflation collapsed and it’s retracing its steps just as quickly as social distancing measures are eased. Strong data should support further market gains but the current V-shaped recovery could flatten out into something more like a square root symbol while we wait for a vaccine or for herd immunity to set in. We are moderately overweight equities and commodities but taking a flexible view allowing for virus news and rising geopolitical tensions. We continue to tilt portfolios towards high yield bonds, US and emerging market equities and the technology sector, all high conviction positions we held before the crisis that continue to perform well.

Downside risk mitigation still important

The Multi Asset Strategies Fund applies the same tactical asset allocation process with a view to generating absolute returns on a five year rolling basis. Risk control measures led us to cut equity exposure significantly in this fund in March. Volatility remains quite high and exposure is still well below its January 2020 level. This more cautious approach should act to limit losses should markets suffer a relapse.

Gold price and US real interest rates (inverted)

Trevor Greetham is Head of Multi Asset at Royal London Investment Management.