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Our views 11 March 2022

Multi Asset Strategies Fund: Controlling downside risk over the Ukraine crisis

5 min read

The Russian invasion of Ukraine triggered a sharp drop in equity markets and a surge in commodities, a pattern calling to mind geopolitical shocks of the 1970s and the two US/Iraq wars in 1991 and 2003.

Royal London’s Multi Asset Strategies Fund (MAST) is designed with the aim of capturing upside in positive market trends while limiting losses during periods of market turbulence. The fund is proving resilient, falling by 2.4% from its high water mark as of 9 March 2022. As of the same date, global stocks were 11.5% off their highs and UK stocks 9.7%.

Figure 1 – Drawdown of MAST in comparison to UK and global equities

Graph shows peak to trough loses of MAST in comparison to UK and global equities from November 2018 to March 2022

Past performance is not a reliable indicator of future results. Source: RLAM. Decline from high water mark for RL Multi Asset Strategies Fund (net of fees), the MSCI World index in GBP terms and FTSE All Share index as of 09/03/2022.

MAST’s resilience over this period is due to three factors, a broadly diversified core portfolio including commodities, a positive tactical asset allocation contribution and, crucially, on-going risk management actions to reduce equity exposure that started ahead of the invasion.

Diversified core portfolio including commodities

The fund starts off with a broadly diversified core portfolio, which includes commodities alongside equity and fixed income exposures. Commodities have been performing well in their role as a diversifier and a hedge against unexpected inflation and geopolitical stress. The Bloomberg Commodity Total Return Index had at one point risen by around 30% year to date. This was all the more impressive against a backdrop of falling stock markets.

MAST also eschews market capitalisation weights for global equities, preferring to start from equally weighted regional equity exposures. As a result, the fund has been less impacted by the underperformance of the expensive US market in recent months as bond yields rose – a trend that we expect to see reasserting itself as the year progresses.

Tactical asset allocation positioned for Stagflation

Our tactical asset allocation positions have been adding value, offsetting some of the downside in equity markets. Growth was already cooling from the breakneck pace of economic re-opening and inflation was already at multi-decade highs before the Ukraine crisis began. In that sense, the conflict has exacerbated stagflationary trends that were already in place and that we are already positioned for.

We entered this period with a large positive tactical position in commodities, short European equities versus the UK and short the expensive technology and consumer discretionary sectors versus value stocks and defensives. These positions have all added value and we have partially or completely taken profits for the time being, reflecting the fact that two-way risk is returning to markets.

Figure 2: Current Tactical Positioning: Profits largely taken for now

Chart shows sliders indicating current tactical positioning by asset class, regional equity, currency and sector

Weightings may vary according to tactical asset allocation and the Fund may invest outside of indicated asset classes as the manager sees fit. The views expressed are the author’s own and do not constitute investment advice.
Source: RLAM, illustrative tactical asset allocation (TAA) positions as at 09/03/2022.

Risk management in force ahead of the invasion

The distinctive factor about MAST is the way we seek to mitigate losses during periods of stress. We started to reduce equity exposure just before the invasion and continued to cut exposures as volatility rose. In total, the equity exposure in MAST dropped from a starting position of around 37% in mid February to a low of 18%, with most of this reduction attributed to risk management.

MAST’s asymmetric investment objective means we are likely to remain modestly exposed to equity markets until volatility drops again or we decide to use the separate risk budget available for tactical positions to express a more positive view. The situation remains highly uncertain, and we are monitoring events and market behaviour on a daily basis to help us keep volatility and the potential for loss under control while being attuned to the potential for a rapid market recovery should geopolitical tensions ease.

Figure 3: Equity target within MAST split between the core portfolio and TAA

Graph illustrates the equity target within MAST split between the core portfolio and TAA from December 2018 to March 2022

Past performance is not a reliable indicator of future results. Portfolio characteristics and holdings are subject to change without notice. This does not constitute an investment recommendation. For information purposes only. Source: RLAM as at 08/03/2022.

Market outlook still challenging

The situation in Ukraine remains finely balanced with possibilities ranging from a broader global conflict to an unexpectedly sudden and complete ceasefire. However, even without the conflict, global macro fundamentals remain challenging. The Investment Clock model that guides our asset allocation is in Stagflation, a stage of the business cycle that often favours commodities and little else. Central banks didn’t raise rates during last year’s strong re-opening phase for fear of a relapse in the pandemic, but that means they are minded to raise rates this year even if growth is cooling off.

At times when investor sentiment is already deeply depressed, as now, we are likely to be broadly neutral on equities from a tactical standpoint as a lot of bad news will already be in the price. A negative view on equities may at times be appropriate if these macro trends persist.

Good news is also possible. Should the war end, commodity prices could drop sharply – and we have seen some big drops lately. Supply chains are also starting to open up as pandemic disruption eases. Taken together, inflation could drop significantly over the year, easing the pressure on central banks to raise rates. A swing back towards Investment Clock Recovery could see stocks rally in a more sustained way.

We continue to believe the best defence against market volatility and macro shocks is to be broadly diversified, to be tactical and to control downside risk through volatility management, and all three of these elements of the MAST strategy are working as expected in these difficult and choppy markets.

Figure 4: Investment Clock in Stagflation

Graph shows the Investment Clock in Stagflation

Trail shows monthly readings based on global growth and inflation indicators.
Source: RLAM. For illustrative purposes only.

Past performance is not a reliable indicator of future results. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.

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The Royal London Multi Asset Strategies Fund is a sub-fund of Royal London Multi-Asset Funds ICVC, an open-ended investment company with variable capital with segregated liability between sub-funds, incorporated in England and Wales under registered number IC001058. The Company is a non-UCITS retail scheme. The Authorised Corporate Director (ACD) is Royal London Unit Trust Managers Limited, authorised and regulated by the Financial Conduct Authority, with firm reference number 144037. For more information on the fund or the risks of investing, please refer to the Prospectus or Non-UCITS retail scheme Key Investor Information Document (NURS KII Document), available via the relevant Fund Information page on