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- Opportunity for returns in turbulent times - it's all in the mix
- Especially in unclear stock market times, it is difficult to find the right investment strategy.
- It is precisely then that many investors attach great importance to forms of investment with calculable risk.
- Balanced funds are characterised above all by their ability to adapt quickly to new situations.
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The attempt to find out intentions when a person being asked can only answer with difficulty is known in the German-speaking world as a “Gretchen” question. Many investors may not be able to find a clear answer to the question of faith about the right investment. Where to invest: in shares, bonds, real estate or even completely different asset classes?
In fact, with the current rather complex market situation, an answer is anything but easy. Because what is happening on the financial markets right now is strongly influenced by politics. In the USA, gigantic investment projects in the national infrastructure are being pushed onto the ramp, paid for by the public sector. This could, for example, support the price of shares in certain sectors, but at the same time also weigh on US government bonds because of the further increase in debt. In addition, central banks on both sides of the Atlantic are still buying up bonds for billions every month. The effect: the valuation of individual asset classes is distorted and interest rates are kept artificially low. And to make matters worse, inflation is coming back stronger than it has for a long time, while booming demand after the pandemic shock of 2020 is still overloading global supply chains.
Economy out of balance - does that mean the old investment rules no longer apply?
It seems as if the relationships between the individual asset classes that have been familiar for decades can no longer serve as a criterion for investment decisions with the same degree of separation as before in view of the economic processes that have gone out of balance. It is indeed apparent, for example, that the suitability of bonds for risk diversification has declined when share prices are falling. "So we have to look for other asset classes to control the risk in a portfolio and be prepared for surprises," says Björn Jesch, Global Head of Multi-Asset & Solutions at DWS, assessing the current situation.[1] "Depending on how inflation and economic growth develop, the different strengths of the asset classes come into play," says Björn Jesch. If inflation rises, for example, value stocks[2], listed infrastructure companies or commodities can be advantageous. On the other hand, growth stocks and listed real estate stocks could benefit from falling inflation. "The toolbox must be expanded significantly in order to master the new challenges well," says Björn Jesch.[3]
In view of the distortions in the real economy, investment strategies in which active management can flexibly balance risks and return opportunities are in particular demand. These characteristics are possessed, for example, by balanced funds in which different asset classes are weighted. Through the possibility of rapid reallocation, for example from equities to commodities or from bonds to real estate, they can consistently exploit upward phases on the market and at the same time contain losses as far as possible.
For example, active fund managers can focus more on rising bond prices when the economy is at a standstill and interest rates are falling, and add more equities to the portfolio when economic growth picks up again.[4] The flexibility also allows balanced funds to cater to different risk tolerances of investors. For example, offensive, i.e. riskier, balanced funds with greater return potential aim for a maximum equity quota of 75 percent. In the defensive variant, on the other hand, the equity portion is a maximum of one quarter. In between is the balanced form, which takes equal account of asset classes and can also include commodities such as gold.
One goal of active management of a balanced fund is to keep volatility within a predefined corridor. Therefore, the fund management must develop a strategy that does not cause so many losses in times of heavy stress, but that generates good positive returns when the market is on the upswing. The broadest possible diversification of a balanced fund can therefore be crucial, especially in economically challenging times. A flexible weighting of different assets and a strict risk framework can have a positive impact on volatility and returns.
Broad diversification offers solid potential in volatile stock market times
"For broadly diversifying fund management, we need to develop a comprehensive and deep understanding of all the characteristics and risks of the individual asset classes," says Thomas Graby. "Only then can we assess whether and how an asset class might be suitable for stabilising the fund. On this basis, we then define the weighting of the individual assets."
The flexible all-round solution for all market situations and risk preferences
Balanced funds are therefore particularly suitable as an all-round solution for savers who want to invest their money over the long term, for example for old-age provision, while keeping risks in check as far as possible. An additional advantage: investors can already invest smaller amounts in balanced funds.[5]
For sensible diversification, the fund manager must develop knowledge about the risks of all asset classes.
Back to the “Gretchen” question. Asked about our (investment) ethos, our answer would be: In complex market situations like the current one, we believe in investment strategies that can react quickly and flexibly to market events - like a balanced fund, for example.
