Steve Gibson on an asset mix to combat volatility

Steve Gibson, portfolio manager of the Fidelity Multi Manager Balanced fund, explains how he is preparing his portfolio for a tough year ahead for investment returns.

As the year of the Dragon and the Olympics gets underway, investment return expectations for the year ahead are low and no wonder given the volatility seen in markets in the second half of last year, caused in no small part by the ongoing political posturing throughout Europe and the US in particular.

With global economic recovery in doubt, alongside the continuing European crisis, diversifying one’s portfolio across asset classes is essential.

If we cannot predict with much certainty which will be the best performing asset classes of the future, it makes sense to have some exposure across them in order to benefit from the diversification offered from their differing characteristics – ‘the not putting all your eggs in one basket approach’.

By spreading investments between bonds and equities, with perhaps some exposure also to property, commodities and cash, as well as hedge fund-like alternatives for the more adventurous investor, our chances of avoiding a large capital loss, while still producing a decent return over a mid to long term period with reduced volatility, are increased thanks to the diversification benefit.

A multi-manager, multi-asset portfolio should provide this exposure for investors, while being flexible enough to take advantage of opportunities that will open up through the year, as the markets move fast to reflect policy change and valuation anomalies that arise while avoiding the most unattractive areas.

Defensive

Within our multi-asset portfolios we are defensively positioned favouring the more defensive equity regions such as the US and the UK while targeting the high quality stocks with low cyclicality that offer high and sustainable dividends from a growing free cash flow yield and at attractive valuations.

There are plenty of companies which have consistently grown their dividend through the financial crisis with strong balance sheets and good capital allocation disciplines that make them well placed to continue to do so. These ‘income’ stocks, like those seen in Neil Woodford’s Invesco Perpetual Income fund, should help investors secure an income stream aside that delivered by bonds.

Furthermore, this fund also provides one of the purest forms of defensive exposure in the UK at a time when the manager has particularly high conviction in the stocks he holds.

Emerging markets

Investors should not ignore Asia and emerging equity markets as these markets are the main source of global growth.