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Multi-Manager: 2011 review and 2012 outlook

2011 was one of the most volatile and challenging years on record. Equity and commodity prices whipsawed in response to numerous seismic events, including the devastating Japanese earthquake, revolutions in the Middle East, and the European debt crisis.

In this environment, generating positive returns and making money was a difficult task. Investors have struggled with market direction. The FTSE 100 reached its high of 6,050 as early as the 13 January. The total fall of around 6% from its peak masks the volatility of equity markets throughout the year. Positive returns were only generated in four of the twelve months.

For many investors the year was all about the market downturn in August when the FTSE 100 fell 6.6%. During October’s bounceback the market rose 8.2%. Many investors fared badly in both those months, especially those that were positioned cautiously in the autumn following the hard losses experienced earlier in the year.

Under these circumstances, portfolio positioning has proved extremely challenging. Higher-risk asset classes have moved in tandem, and the resulting high correlation has made diversification virtually ineffectual. We are currently working hard on repositioning our portfolios for 2012, a year we predict will be similar to 2011 in several ways. The heightened levels of volatility don’t show any signs of going away, while low economic growth rates and elevated inflation also look likely to persist.

We intend to position portfolios with a focus on cash, and good quality assets with more of an emphasis on income and absolute return. Diversification remains important and we expect the very high correlation levels between asset classes to begin to fall in 2012. We expect investors to focus more closely on fundamentals. It is worth pointing out that corporate results have generally been good, while companies have, on the whole, continued to improve the health of their balance sheets.

Another possible reason for optimism is that the US appears capable of picking up pace over the next year or two. A rebound in Japan is possible as well, following the tragic earthquake earlier last year. However, the overall economic outlook for 2012 is one of divergence rather than uniform gloom.

Although Europeans will hopefully get further down the path to some sort of resolution, the eurozone does look to be heading for recession as a result of tightening credit conditions, increased fiscal austerity and depressed confidence.

The consensus from the managers we speak to is that despite some highly attractive valuations, they lack the confidence to get back into risk assets. Until evidence that Europe is sorting out its debt problems and/or there is evidence of solid economic growth, any stock market rally is not likely to be sustained.

Against this background, we shall continue to adopt a relatively cautious approach for the time being. That said, we shall continue to make trades according to our judgements of asset valuations. So we may well look to buy more equities following periods of stock market weakness and sell into strength. This applies to all asset classes.

Important notes

The information contained in this document has been derived from sources which we consider to be reasonable and appropriate. Investment markets can change rapidly and the views expressed should not be taken as statements of fact, nor relied upon when making investment decisions. Forecasts are opinion only and cannot be guaranteed.

Mark Harries, Investment Director - SWIP, January 2012

Please note that these are the views of Mark Harries, Investment Director, Scottish Widows Investment Partnership, and should not be interpreted as the views of RL360°.


Mark Harries

Investment Director, SWIP
January 2012

Please note that these are the views of Mark Harries, Investment Director, Scottish Widows Investment Partnership, and should not be interpreted as the views of RL360°.

360° fund links

A range of SWIP funds can be accessed through our guided architecture products Oracle, Paragon and Quantum, and also through our PIMS portfolio bond.