Recent weeks have brought a sharp rise in market volatility, driven largely by heightened tensions in the Middle East. At points, a number of asset prices, including many equity markets, fell significantly. In this month’s Portfolio Perspectives, we explain how Saranac manages multi asset portfolios in more volatile periods, and why a disciplined investment process matters most when uncertainty is high.
Our approach is grounded in four core principles. First, we seek to maintain sufficient diversification so that parts of the portfolio can help protect capital when markets are under pressure. Second, we assess whether market moves have created mispricings, identifying areas where asset prices may have moved further than fundamentals justify. Third, we define valuation levels that could trigger more meaningful portfolio changes if they emerge. Fourth, we avoid over trading on the basis of incomplete information or simply reacting to market noise. Together, these principles help us stay focused on long term fundamentals rather than making low quality market timing decisions in fast moving conditions.
This framework is particularly important in a period like the present one. Saranac’s portfolios are managed with long term objectives in mind. Across portfolios, we aim to deliver returns above cash, inflation and peers over time, while also seeking to protect against short lived but significant market corrections where possible. What we do not seek to do is eliminate all short term losses. Attempting to derisk aggressively during every setback would require frequent decisions about when to re enter markets, and those decisions are notoriously difficult to get right consistently. Investors risk missing not only the decline, but also the rebound.
This challenge is even greater when volatility is being driven by uncertain geopolitical developments. In such an environment, the range of possible outcomes is wide and visibility is limited. While we monitor events closely, we do not believe that ongoing regional tensions alone justify an aggressively defensive stance. For global markets, the more important transmission mechanism is the oil price. As long as oil continues to flow, broader market implications are more contained. This is why we have remained reluctant to make major top down allocation changes in response to recent headlines alone.
So far, that measured stance has not had material consequences for performance. Equity markets sold off sharply at one stage, but subsequently recovered. In local currency terms, global equities are currently around where they started the year. It is possible that the global economic backdrop could still weaken if the shock proves more persistent, and there may come a point where a more fundamental change in positioning is justified. However, the most obvious investment response is not always the best one. Markets can often look through a difficult period if investors can see a plausible path beyond it.
Another reason for maintaining our current stance is that portfolios were not positioned aggressively before this episode began. Equity exposure was already somewhat below the level we would expect to hold on average over time, reflecting extended valuations in parts of the market and a subdued global economic cycle. That meant we were not under pressure to reduce risk further as volatility rose.
Diversification has been central to maintaining stability. In stressed market conditions, it is important that parts of the portfolio can “kick in” automatically, without requiring immediate decisions in the moment. In Saranac’s multi asset portfolios, five components have contributed to that resilience. Derivative protection strategies were in place during the initial phase of the stress, although their impact on returns was modest and current pricing is not attractive enough to replace them. Fixed income has also played a stabilising role. While higher energy prices raise the risk of a more stagflationary backdrop, bond yields started from a much higher level than in 2022, offering a greater degree of protection. Returns from fixed income have therefore been broadly flat year to date, despite recent market pressure.
Hedge fund exposure has also supported diversification. Its role is not to act as a dramatic tail risk hedge, but to generate steadier returns with limited sensitivity to either equity or bond markets. That expectation has broadly been met so far this year. Gold has provided another important source of resilience. Having increased the allocation a couple of years ago as a hedge against stagflationary risks, we trimmed it earlier this year at higher levels and have since left the position unchanged. Despite a recent correction, gold is still up around 10% year to date, reinforcing its value as a diversifier. Within equities, our allocation to minimum volatility strategies has also helped cushion returns, given its bias towards businesses with less cyclical earnings and stronger relative performance in downturns.
Periods of market stress can also create opportunities, and in recent weeks these have been more evident in fixed income than in equities. Higher yields have supported increased allocations to UK credit, particularly at shorter maturities, as well as mortgage backed securities. In addition, the rise in implied volatility has improved the attractiveness of some structured products, leading us to raise exposure there as well.
By contrast, there have been fewer opportunities for meaningful reallocation within equities. Although energy equities have risen strongly, broader sector price moves have been relatively similar, leaving limited change in relative value at the sector level. Given that uncertainty around the oil price is closely tied to uncertainty around relative equity performance, we have not changed the portfolio’s energy positioning.
Looking ahead, we continue to identify valuation levels that could justify more meaningful portfolio changes if markets weaken further. These include the potential to add to gold on renewed price weakness and, more importantly, the possibility of rebuilding equity exposure towards a more normal level if valuations begin to offer stronger long term return potential. Until then, our focus remains on discipline, diversification and selective reallocation rather than reactive market timing.
Read the April Outlook here.
