What are low risk assets?

Anthony Rayner

Premier Miton Macro Thematic Multi-Asset Team

This is the first in a series of three pieces that look at low risk assets.

Looking across multi-asset at what constitutes low risk assets is a good place to start because, perhaps surprisingly, the answer’s not always the same. US Treasuries are seen as the definitive safe haven asset and that perception was reinforced during the last three decades.

US government bonds have made high returns over that period, perhaps suspiciously so for a safe haven. Nevertheless, during equity market downturns, they also provided some balance in portfolios, generally benefiting from central bank easing, so they retained their safe haven crown.

No more: the dominant economic risk dynamic has changed and, with that, so has the nature of what constitutes a low risk asset. The last thirty years have been very clearly defined by low inflation and very low rates. The dominant risks were weak growth and deflation. In stark contrast, more recent times have been characterised by rising inflation and more hawkish central banks.

In this inflationary environment, US Treasuries, far from being safe haven assets, have been one of the primary expressions of inflation risk. As a result, US Treasuries and many bond sub-asset classes have experienced losses over the recent period, as a more inflationary environment is seeing nominal assets like bonds struggle.

That said, bonds are the biggest asset class in the world and, with that, comes numerous sub-asset classes with different qualities, ranging from cash-like to equity-like. In short, not all bonds are the same, a subject which we will be exploring later on in the series.

So, what constitutes a low risk asset in a world of higher inflation? In some ways, the risk hierarchy gets turned on its head. Many of the non-fixed income areas, such as equities, commodities and property are real assets, and so are more inflation-friendly. As a result, they might well end up behaving in a lower risk fashion, in a relative and absolute sense, even though they are traditionally considered higher risk. Indeed, the importance of considering how assets behave in relation to each other shouldn’t be underplayed, especially in the wider context of diversifying portfolios.

In addition to this new medium term economic dynamic, geopolitical risk has spiked recently due to Russia’s military action in Ukraine. Other than generally hurting risk-on assets, it has had two major impacts on financials assets. Firstly, safe haven assets like US government bonds and gold have benefited, secondly many commodities have surged higher due to concerns around their supply, for example energy and wheat. As a result, this has further increased the momentum for higher inflation and it has muddied the waters for central banks by increasing stagflation risk.

Certainly, in our opinion, the structure of what low risk means is changing. As a result, low risk portfolios need to change too. For global multi asset funds, especially in the perceived lower risk IA Mixed Investment 0-35% Shares sector, we believe that a pragmatic mindset and a liquid portfolio are helpful attributes at times like this because what has been low risk in the past might well not be in the future.

Next week we will look at a number of theoretical levers that can be pulled, across assets, from a low risk perspective and for the third and final week, we home in on what we are actually doing in our lower risk funds currently.

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Risks

The value of stock market investments will fluctuate, and investors may not get back the original amount invested.

Higher inflation can lead to some investments falling in value, particularly those with a fixed level of interest, for example government bonds and corporate bonds.

Government and corporate bonds generally offer a fixed level of interest to investors, so their value can be affected by changes in interest rates. When central bank interest rates fall, investors may be prepared to pay more for bonds and bond prices tend to rise. If interest rates rise, bonds may be less valuable to investors and their prices can fall.

Where investments in a fund are denominated in currencies other than sterling (for example, if a fund holds assets priced in euros), its value will be affected by changes in the relevant exchange rate. Certain other investments, such as the shares in companies with profits from other countries, will also be effected.

Equities (shares) can experience high levels of price fluctuation.

Commodity prices can fall and rise sharply depending on supply and demand, the economic background and financial market conditions. Exposure will never be direct to any commodity.

Property values can rise and fall sharply depending on the strength of a country’s economy.

Future forecasts are not reliable indicators of future returns.

IMPORTANT INFORMATION:

For Investment Professionals only. Not for onward distribution. No other persons should rely on any information contained within this document.

Whilst every effort has been made to ensure the accuracy of the information contained within this document, we regret that we cannot accept responsibility for any omissions or errors. The information given and opinions expressed are subject to change and should not be interpreted as investment advice.

All data is sourced to Premier Miton unless otherwise stated. Persons who do not have professional experience in matters relating to investments should not rely on the content of this document.

For your protection, calls may be monitored and recorded for training and quality assurance purposes.

Issued by Premier Miton Investors. Premier Portfolio Managers Limited is registered in England no. 01235867. Premier Fund Managers Limited is registered in England no. 02274227. Both companies are authorised and regulated by the Financial Conduct Authority and are members of the ‘Premier Miton Investors’ marketing group and subsidiaries of Premier Miton Group plc (registered in England no. 06306664). Registered office: Eastgate Court, High Street, Guildford, Surrey GU1 3DE.

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This section of the website and the content it contains is for retail clients only and by persons who are resident in the United Kingdom [who are not US persons]. Professional advisers should refer to the Professional Advisers site.

The content of the pages of this website is for your general information only. It, and the products and services described within it, are subject to change without notice. We shall not be liable to you, or any third party, for any amendment, modification, suspension or discontinuance of any product or service described on our website. Neither we, nor any third parties, provide any warranty or guarantee as to the accuracy, timeliness, performance, completeness or appropriateness of the information and materials made available on this website.

You acknowledge that such information may contain inaccuracies or errors and we expressly exclude liability for any such inaccuracies or errors to the fullest extent permitted by law. Your use of any information or materials is entirely at your own risk, for which we shall not be liable.

The information contained on this website does not constitute an offer or solicitation to sell or purchase shares in the funds or portfolios or to provide you with other products or services. Any application or investment must only be made on the basis of the relevant documentation of the investment, such as, for example, terms and conditions. The information on this website does not constitute any investment, tax, legal or other advice. Persons who do not have professional experience in matters relating to investments should always consult with an independent financial adviser before making an investment decision. Any opinion expressed on individual funds, services or products represent the views of the individual at the time of preparation and should not be interpreted as a personal recommendation to buy or sell or otherwise trade all or any of the investments that may be referred to.

Website terms of use: Please ensure you have read and accept the full 'website terms of use' before continuing.

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Disclaimer

This section of the website and the content it contains is for professional financial advisers only and should not be relied upon, or circulated to, retail clients. Retail clients should refer to the Private Investor's site.

The content of the pages of this website is for your general information and use only. It, and the products and services described within it, are subject to change without notice. We shall not be liable to you, or any third party, for any amendment, modification, suspension or discontinuance of any product or service described on our website. Neither we, nor any third parties, provide any warranty or guarantee as to the accuracy, timeliness, performance, completeness or appropriateness of the information and materials made available on this website.

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The information contained on this website does not constitute an offer or solicitation to sell shares in the funds or portfolio or to provide you with other products or services. Any application or investment must only be made on the basis of the relevant documentation of the investment, such as, for example, terms and conditions. The information on this website does not constitute any investment, tax, legal or other advice. Persons who do not have professional experience in matters relating to investments should always consult with an independent financial adviser before making an investment decision. Any opinion expressed on individual funds, services or products, represent the views of the individual at the time of preparation and should not be interpreted as a personal recommendation to buy or sell or otherwise trade all or any of the investments that may be referred to.

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