MA ActiveDeclines across equities, bonds and commodities impacted ourMulti-Asset solutions this quarter. Rising interest rates, ongoing fearsof recession and geopolitical concerns all weighed on financialmarkets.The benefits of diversification have been noticeably absent. Fixedincome, which we have pointed out previously this year, wouldusually be expected to provide defensive ballast during equity selloffs, but it failed to provide any defensive support yet again asyields continued to rise in Q3. We are in a rare period of extremestress in which normal asset class diversification has temporarilybroken down.As part of our asset allocation rebalancing, our target exposure tofixed income has increased slightly, particularly in favour of non-UKgovernment bonds. We have been under-weight fixed income forsome time but we are taking the opportunities to reduce this asyields, which are inversely related to price, increase.All major global sovereign bond yields have risen this yearand some bond markets, notably the UK, have even performedsubstantially worse than equities. While global government bondsstill offer yields below current inflation, they do offer the prospectof ‘real’ yields further ahead and we believe the asset class stillprovides important long-term diversification benefits that help ourproducts to match risk suitability requirements.Our strategic asset allocation requires significant exposure to UKgilts, especially in funds and portfolios with lower risk profiles.Over the last two decades, the gilts market outperformed the globalbonds market hedged into sterling, benefitting our clients over asubstantial period. But the political events at the end of September26 - Liontrust Multi-Asset Funds and Portfolios Quarterly Report: Q3 2022in the UK impacted the gilts market and consequently detractedfrom our performance.Our exposure to equities has been trimmed, given the uncertaintythat the asset class faces. This reflects the greater uncertainties thatexist currently with respect to interest rate policies and economicgrowth. It makes sense for us to tighten up on risk budgets, at leastfor the short term.After being a relative positive in Q2, our Emerging Markets exposureweighed on our performance in Q3. The region struggled on thestrengthening US dollar and slowing global economic growth.Emerging markets are particularly vulnerable to the rising dollarbecause it raises the cost of their imports and debt repaymentsand they may also have to raise their domestic interest rates tostem outflows of capital. Asia also suffered in particular from thedeteriorating outlook for international trade.The region contributing relatively the most to performance acrossour Active funds was North American Equities. Within this, the mostprominent contributors were AB American Growth and OssiamShiller Barclays CAPE US Sector Value, an ETF based on Shiller’scyclically-adjusted price to equity metric and skewed towards thefour most undervalued sectors on a monthly basis. The iSharesOverseas Government Bonds Index was also a leading contributor.Exposure to bonds, especially gilts and, in our higher risk fund, toemerging market equities, detracted from performance, with poorerperforming funds including Vanguard UK Government Bond Index,Liontrust Sustainable Futures Corporate Bond, iShares UK GiltsAll Stocks Index and Vontobel mtx Sustainable Emerging MarketsLeaders.
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