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Baring’s Cole stresses active management of equity exposure

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Andrew Cole, manager of the Baring Multi Asset Fund, has highlighted the importance of actively managing the equity exposure within a multi-asset portfolio rather than slavishly followi

Andrew Cole, manager of the Baring Multi Asset Fund, has highlighted the importance of actively managing the equity exposure within a multi-asset portfolio rather than slavishly following the traditional asset splits of 60 per cent equity, 30 per cent fixed income, and ten per cent cash.

Cole was speaking at a roundtable event hosted by Barings and attended by investment IFAs Darius McDermott and Ben Yearsley. 

Barings believes that by taking active asset allocation decisions that essentially centre on whether you are being sufficiently rewarded for the risk taken, they can suitably manage the profile of the fund in order to generate returns in the good years and protect investors in the down times. 

Barings’ institutional multi-asset pooled product, the Baring Dynamic Asset Allocation (DAA) Fund, returned -5.44 per cent during 2008. This can be compared with the IMA cautious managed sector which returned an average of -15 per cent over the same period.

Cole says: ‘We have a strong belief in the equity risk premium, which is the idea that over the long term equities offer the highest rate of return, given they are the riskiest element of any capital structure. However, believing in the equity risk premium does not dictate that we need to stay allocated to equities regardless.

‘Many investors’ perceptions about equity returns are skewed by the returns achieved during the 1980s and 1990s. This was a period of great revaluation following the 1970s bust and so many tend to think that returns come from equities no matter what and that what determines performance is how much added value you can get from your equity portfolio. The truth is that this period was actually the anomaly and we have returned to a more volatile investment environment more akin to the past 100 years. We believe investment returns will be less driven by how well you do in your equity portfolio, but increasingly whether you are in the appropriate asset at any moment in time and that includes equities.’

Barings takes a long term view based on macro economic indicators to work out whether or not they are being adequately rewarded for taking the risk of owning shares or indeed other assets. 

Cole adds: ‘We do not claim to forecast how the market will move on a day-to-day or even a month-to-month basis. But by taking a longer-term view of a year to 18 months we think it is possible to work out whether you are being adequately rewarded for holding shares. It is our view that multi-asset managers should not diversify across assets simply because they have the ability to do so. The days of diversification for the sake of it are over and we believe that returns in a multi-asset portfolio will only come from taking active asset allocation decisions as the markets dictate.’

Barings has been increasing its exposure to equity markets since October 2008 following early signs that equities were on the brink of recovery. At the lowest point, Barings’ multi-asset portfolios had only 15 per cent in equities. However, within a matter of weeks the optimum asset weightings had altered radically. Today, the asset split within the Baring Multi Asset Fund is 31 per cent UK equities, 21 per cent corporate bonds, ten per cent global index linked bonds, 22.7 per cent in overseas equities and no exposure to UK gilts.

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