Mandatum Life Allocation portfolio management – August
ML Allocation basket returns were between +0.94% and +2.08%.
In recent months, the investment markets have been concerned about the prolonged postponement or slowing of economic recovery due to the Delta variant of the coronavirus. Some of these concerns have proved unfounded, as many countries have continued to gradually lift restrictions. Meanwhile, there are no longer any positive surprises in the economic data in relation to market expectations; instead, the data published over the past few weeks has mainly been negative. This is typical when peak growth is behind us and growth settles back near the long-term trend. The economy is still growing, but no longer faster than expected.
As the economy grows, central banks are expected to reduce their securities purchases, engaging in a path of gradually tightening monetary policy already by the end of this year. The path will be a long one, however, and the central banks have reassured the markets by insisting that cutting down on the purchases is not the first step towards key interest rate hikes. When it comes to stimulus, the central banks also receive support from governments. Especially the USA is planning a large infrastructure package that is meant to support the country’s economic growth.
The equity markets are supported by companies’ strong earnings growth. In addition to earnings growth, the low return expectation on fixed income investments is a reason why many investors prefer to stick with equities despite a relatively high valuation level. However, return expectations have been revised down following the stock price surge, suggesting that the equity markets are already pricing in a fairly favourable outlook for the next few years, which encourages restraint in risk-taking. In August, we somewhat increased the share of US industrials in equity investments while reducing that of US technology companies. During summer, the stocks of cyclical sectors, such as industrials, have shown more moderate development than the general markets, as the Delta variant of the coronavirus has been feared to slow economic recovery. The emerging equity markets have shown poor performance over the summer due to, above all, China’s tightening regulation, which primarily affects technology companies. When reducing investments in the Chinese market, international investors have also sold companies in sectors that are not affected by the tightening and increasing regulation. According to our insight, this creates opportunities for active stock pickers. That is why we have transferred investments from an index fund to an actively managed fund in the emerging markets.
The credit risk premiums on corporate bonds have remained low, due to which the return expectation is low and attractive opportunities are limited. In fixed income investments, the focus is on our domestic market, on Nordic companies that we know well. Furthermore, we focus on loan-form investing, where the return level is currently better than in the bond markets and the interest rate risk is low, as the loans generally have floating rates. We do not invest in euro-zone government bonds due to the low return level, and government bonds account for a very small proportion of our fixed income investments. In August, we reduced European low-risk corporate bonds and, correspondingly, increased the share of the ML Senior Loan strategy.
According to our view, alternative investments will continue to play a key role in building a long-term, well-diversified investment portfolio. In the current low interest rate environment, long-term investors are well advised to capitalise on the additional return offered by limited liquidity, i.e. the liquidity premium. We continue to see opportunities for long-term investors in alternative fixed income investments, with the focus entirely on private arrangements. In real estate investments, we invest with portfolio managers specialised in property development, who are good buyers and have the ability to refine properties through active measures. In private equity investments, we are selectively active, looking for individual projects that are not debt driven. During this year, the improved investment environment has also had a positive impact on the valuations of alternative investments.