Emma Wall: Hello and welcome to the Morningstar series, "Ask the Expert." I'm Emma Wall and I'm joined today by Morningstar Fund Analyst, Randal Goldsmith.
Randal Goldsmith: Hi there.
Wall: Hi, Randal. So, you look after the multi-asset sector when you are reviewing funds, analysing funds for Morningstar. It's an incredibly broad sector. I mean, you can have two funds in there that look nothing alike and yet all group together.
But as a whole, it's quite a good indicator of where markets lie because these are professional investors that can choose between investing in bonds, in equities, anywhere in the world and so they are quite a good indicator of where the best opportunities are.
I thought perhaps we'd start by looking at equities versus bonds because of course multi-asset can invest in both. So, what's the preferred asset class?
Goldsmith: Well, I would say that generally, the multi-asset managers that I've spoken to are more cautious of bonds than they are of equities at the moment and I would say in particular they are more cautious of government bonds on the basis that they feel that the yields are so low at the moment that they don't cover for the risk of inflation being higher in future.
Wall: And of course, we've been hearing about the bond bubble bursting for about three years now, but if finally does look as if yields are going to start to rise and prices are going to start to fall. Is this something that's a concern of multi-asset managers? Obviously, they have to hold some bonds because they are great for diversification, but on the whole, do we think equities offer a better opportunity set?
Goldsmith: It depends on your outlook. Since the beginning of the year bonds have corrected a bit in the sense that the yields have moved up and the prices have moved down. But going forwards at current prices it depends on whether you expect growth to be strong in future or whether you expect growth to disappoint and inflation to be subdued. In the latter case then even at the level of bond yields currently you might be happy to invest.
Wall: And the multi-asset managers where are they looking within the bond space? You've mentioned there that they don't like government bonds or a number of them don't because they think they don't look like attractive bets. Where else are they looking then?
Goldsmith: It depends on the mandate. A lot of funds that I've been covering recently been multi-asset income type of funds, distribution funds which are very similar basically multi-asset funds that are constrained to investing in equity and bonds but delivering income.
For those funds they are generally cautious. So they have to have some bonds but they aim to deliver a regular income and because of that aim, as the fund move towards higher-yielding fixed income and in the current environment that means taking some credit risk.
Wall: What then about equities because of course within the sector they can have this incredibly broad remit to invest anywhere in the world that they wish to. Obviously, when you drill down more into fund specifics, some of them have restrictions. But on the whole where are these fund managers looking to put their equity allocation to the multi-asset fund? Is it developing markets, it is developed markets?
Goldsmith: Generally, the multi-asset managers that I've spoken to been fairly cautious on emerging markets or not that many multi-asset funds that have a lot of scope to invest in emerging markets anyway. But even to the extent they have got discretion, it's not very much at the moment. There used to be some funds, Jupiter's multi-asset team, they used to have meaningful exposure to emerging markets.
Neptune used to have quite a lot of exposure to emerging markets. But in recent years they've cut back. So, they are more focused on developed markets currently and I would say that within the past year or two they've become more willing to take exposure to Japan and also to Europe.
Wall: Randal, thank you very much.
Goldsmith: You're welcome.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
