Melville Jessup Weaver (MJW) principal, Ben Trollip, has warned against the temptations of market timing despite historically high valuations across almost all asset classes, positive correlations and suppressed volatility.
In the December quarter MJW investment survey published last week, Trollip says most investors should ignore the lure of tactical asset allocation (TAA) even amid an unusual brew of metrics that have previously portended a market meltdown.
He says the blend of extreme equity valuations (concentrated in just a handful of companies), strong stock-bond correlations, tight credit spreads and a shrinking “illiquidity premium” all might trigger TAA enthusiasts to act.
However, Trollip says other “competing narratives” such as falling inflation, generally positive economic conditions and a “business friendly” Trump administration suggest caution on TAA moves.
“Even if markets are overvalued, they can remain expensive for longer than one thinks is rational. It is possible that the dynamics we are seeing today will persist, or indeed intensify. While it seems that investors today are being paid less for taking risk in certain areas, this is arguably justified given the healthy state of the global economy,” he says.
“Thus, while we are cautious as we enter 2025, being prepared for potential volatility and drawdowns, we do not advocate for tactical, short-term moves unless one is adequately set up to do this well…”
Well-executed TAA can boost long-term performance and decrease volatility, Trollip says, but the trick is difficult to pull-off consistently while the pay-off is usually not worth the risk.
Most investors should just focus on “the long-term mission”, he says.
The December quarter MJW survey shows the long-term mission is travelling on course with all funds (including KiwiSaver) with a 10-year performance record covered in the report in the black over that period.
But, as expected, shorter-term data showcases more return variance both between and within asset classes.
For example, global bonds, listed property and infrastructure funds all struggled during the final three months of 2024 with most in those categories reporting losses, according to the MJW report.
At the same time, local fixed income strategies ended up for the three-month period while most equity funds – especially global shares – enjoyed another bumper quarter.
The median core international equites fund in the survey returned 12.1 per cent (before fees) during the December quarter and 33 per cent for the 12-month period.
Over the three months to December 31, global share fund performance across the MJW survey ranged from 4 per cent for the Vontobel Asset Management Global Environmental Change strategy to the Hyperion Global Companies result of 33.7 per cent – both classified as growth players: Hyperion also topped the 12-month table (up almost 60 per cent) with even the lowest-performer, the Fiera Atlas fund, returning almost 15 per cent for the annual period.
All KiwiSaver funds in the MJW universe were also up for the December quarter bar the ANZ conservative strategy (-0.1 per cent).
In fact, the ANZ KiwiSaver diversified funds ranked bottom across all risk categories over every timeframe stretching out to 10 years.
The largest KiwiSaver manager, which runs about $21 billion across its three schemes, outsourced some administration, asset allocation and investment duties to BlackRock last year as part of wider reform process in the business.
Generate and ASB had the best of quarterly and annual KiwiSaver growth and balanced returns, respectively, with Fisher Two ending ahead in the conservative cohort over the three months.
Meanwhile, Milford retains top-rankings for KiwiSaver growth, balanced and conservative strategies for the 10-year periods despite its shorter-term performance fading somewhat.
Milford was underweight growth exposures coming into to 2024 but has since increased allocations to riskier assets in the diversified funds.