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Tailored for investment professionals this site provides information on our products, strategies and services. Please remember capital is at risk and past performance is not a guide to the future.

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Investment views

Why defence makes sense

11 October 2019
Authors: John StopfordHead of Multi-Asset Income, Jason Borbora-SheenPortfolio Manager

At a glance

  • The worst drawdowns typically happen in recessions. Investors have experienced even worse drawdowns in this bull market than previous ones.
  • This is particularly harmful to investors with nearer-term horizons, who are relying on assets they have built up previously, such as retirees who need attractive, sustainable income in their later years – especially now they're living longer.
  • Why is this happening now? We believe a changing market structure caused by slower economic growth, central bank intervention and more passive investors in the market could be the culprit

Recession obsession

Many commentators are talking about an increasing risk of recession. Our own recession probability models agree, with Figure 1 showing more than a 50% chance of a recession happening in the next two years. As recessions are typically associated with much worse market returns, this increasing risk has led investors to look for defensive strategies that emphasise drawdown management.

We believe that even outside of periods of increased recession risk, defence makes good sense for investors – particularly for those whose investment horizon is limited.

Figure 1: US recessions and Investec two year ahead recession probability model

Figure 1: US recessions and Investec two year ahead recession probability model

Forecasts are inherently limited and not a reliable indicator of future results.

Source: Investec Asset Management, 31 August 2019.

Misbehaving drawdowns

We think the nature of markets has evolved since the global financial crisis. Our analysis of markets since 1987 (the year of the Black Monday crash) shows that before 2009, outside of the ‘bear markets’ often associated with recessions – when stock markets drop 20% or more from recent highs – investors tended to see drawdowns that were ‘well-behaved’: an equal weighted bond-equity portfolio suffered very few drawdowns of more than 5%, and never as much as 10%.

By contrast, in the current cycle we have so far seen six episodes of more than 5% drawdown including one of more than 10% – an unprecedented frequency and magnitude of drawdown for a bull market over the last 30 years. This can be seen in Figure 2.

Figure 2: Drawdown of an equal weighted bond/equity portfolio

Figure 2: Drawdown of an equal weighted bond/equity portfolio

Source: Bloomberg and Investec Asset Management, 31 July 2019.
Drawdown of equal weighted portfolio refers to MSCI ACWI & WGBI.

Is a changing market structure to blame?

We think there may be multiple drivers of this increased fragility across asset classes:

  • The rate of economic growth has been slower over this cycle than in past cycles, meaning the global economy has teetered closer to the edge of recession (and therefore to the risk of severe drawdowns) than it did before.
  • To deal with this, central bank market intervention has become more significant and creative than it was previously, potentially leading to a ‘feast or famine’ environment for liquidity.
  • The ability of private sector banks to absorb risk has been curtailed by regulation and shareholder demand for their business models to become more dependable.
  • Passive ETFs/tracker indices make up a greater proportion of the investor base, potentially leading to more herding into and out of positions, thereby exacerbating market moves.

The number of US-listed ETFs has grown exponentially over the years

The number of US-listed ETFs has grown exponentially over the years

The impact of these changes is evident in the number of ‘flash crashes’ – instances when asset values changed significantly over a short period of time – seen in this bull market. These flash crashes aren’t just confined to equity markets (as can be seen in the timeline on the right) and are likely a consequence of liquidity becoming more susceptible to drying up than before.

Impact for investors

This changing market structure and the resulting increased frequency in drawdowns has a significant impact for investors. This risk is particularly relevant for those investors whose horizons are not aligned to the economic environment, but rather to their own specific needs for returns, as their assets may not be able to recover from a drawdown in time to meet their liabilities.

One cohort of investors particularly impacted are retirees, or those approaching retirement. These investors are not able to rely on future earnings being able to fund shortfalls caused by investment losses and so have to depend on the assets they have already built up through their working life. With the world population ageing, these investors are living for longer and so need to make their wealth last for longer. For these investors, drawdowns can be fatal to their investment objectives.

Recent flash crashes

Recent flash crashes

Source: Redburn and Investec Asset Management, 31 August 2019.

Drawdowns – what is needed to recoup losses

Drawdowns – what is needed to recoup losses

Source: Investec Asset Management, 31 August 2019.

Why defence makes sense

The Global Multi-Asset Income Fund focuses on defensive returns, which we define as having a lower downside capture than upside. We believe this focus makes sense irrespective of the market backdrop to investments.

Figure 4 shows the peak-to-trough performance of the Fund and its peers in the most severe recent drawdown episodes. The blue line shows the least dramatic falls during these challenging periods, meaning our approach shielded against capital losses more so than any of our comparative peers. By then ‘un-hedging’ risk when appropriate, we were able to recover losses more quickly and so avoided the worst of the negative impact.

Figure 4: Peak to trough performance during drawdown episodes

Figure 4: Peak to trough performance during drawdown episodes

Calendar year returns for the Fund (and competitor group); 2018: 0.5% (-9.4%); 2017: 6.0% (8.7%); 2016: 4.4% (6.7%); 2015: 0.9% (-2.4%); 2014: 3.7% (4.2%).

Morningstar, 31 August 2019. Period shown is since 30 September 2013. Performance is net of fees (NAV based, including ongoing charges, excluding initial charges), gross income reinvested, USD. If the share class currency differs from the investor's home currency, returns may increase or decrease as a result of currency fluctuations. The competitors shown for comparison purposes are the five largest Luxembourg/Dublin domiciled Multi-Asset income funds by AUM based on our Multi-Asset team’s analysis of the competitor landscape. For further information on indices, please see the Important information section.

Limiting the downside

When the equity market fell, the Fund only experienced 16% of those losses. While if the market gained, the Fund experienced 34.6% of those gains.

By concentrating on minimising downside correlation (in contrast to many funds which focus on producing no correlation) the Fund has produced more than double the upside capture relative to downside1. This positive skew is a powerful attribute to compound returns in an environment offering little potential capital appreciation.

Limiting the downside


For investors, the benefit of investing in a defensive fund during a recessionary period should be clear, as the aim to reduce drawdowns in significantly falling markets makes it easier to regain capital in the future.

However, with market structure changes leading to the increased frequency and magnitude of bull market drawdowns and flash crashes, a defensive strategy has an important role in an investor’s portfolio throughout the cycle, particularly for those investors with nearer-term liabilities and needs. We believe this is why defence always makes sense.


Investec Global Multi-Asset Income Fund

In today's markets, drawdowns can strike unexpectedly.

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1 Investec Global Multi-Asset Income Strategy average monthly gain and loss as a proportion of Global Equities average gain and loss. Source: Investec Asset Management, in USD gross of fees and taxes with income reinvested, Global Equity returns are for MSCI AC World Index NDR, from 01 June 2013 to 31 August 2019. For further information on indices, please see the Important information section.

General risks: The value of investments, and any income generated from them, can fall as well as rise. Where charges are taken from capital, this may constrain future growth. Past performance is not a reliable indicator of future results. If any currency differs from the investor’s home currency, returns may increase or decrease as a result of currency fluctuations. Investment objectives and performance targets are subject to change and may not necessarily be achieved, losses may be made.
Specific risks: Currency exchange: Changes in the relative values of different currencies may adversely affect the value of investments and any related income. Default: There is a risk that the issuers of fixed income investments (e.g. bonds) may not be able to meet interest payments nor repay the money they have borrowed. The worse the credit quality of the issuer, the greater the risk of default and therefore investment loss. Derivatives: The use of derivatives may increase overall risk by magnifying the effect of both gains and losses leading to large changes in value and potentially large financial loss. A counterparty to a derivative transaction may fail to meet its obligations which may also lead to a financial loss. Emerging market (inc. China): These markets carry a higher risk of financial loss than more developed markets as they may have less developed legal, political, economic or other systems. Equity investment: The value of equities (e.g. shares) and equity-related investments may vary according to company profits and future prospects as well as more general market factors. In the event of a company default (e.g. insolvency), the owners of their equity rank last in terms of any financial payment from that company. Interest rate: The value of fixed income investments (e.g. bonds) tends to decrease when interest rates rise. Government securities exposure: The Fund may invest more than 35% of its assets in securities issued or guaranteed by a permitted sovereign entity, as defined in the definitions section of the Fund’s prospectus.


John Stopford
John Stopford Head of Multi-Asset Income
Jason Borbora-Sheen
Jason Borbora-Sheen Portfolio Manager

Important information

This content is for informational purposes only and should not be construed as an offer, or solicitation of an offer, to buy or sell securities. All of the views expressed about the markets, securities or companies reflect the personal views of the individual fund manager (or team) named. While opinions stated are honestly held, they are not guarantees and should not be relied on. Investec Asset Management in the normal course of its activities as an international investment manager may already hold or intend to purchase or sell the stocks mentioned on behalf of its clients. The information or opinions provided should not be taken as specific advice on the merits of any investment decision. This content may contains statements about expected or anticipated future events and financial results that are forward-looking in nature and, as a result, are subject to certain risks and uncertainties, such as general economic, market and business conditions, new legislation and regulatory actions, competitive and general economic factors and conditions and the occurrence of unexpected events. Actual outcomes may differ materially from those stated herein. Inc-2 share class expenses are charged to the capital account rather than to income, so capital will be reduced. This could constrain future capital and income growth. Income may be taxable.

Indices are shown for illustrative purposes only, are unmanaged and do not take into account market conditions or the costs associated with investing. Further, the manager’s strategy may deploy investment techniques and instruments not used to generate Index performance. For this reason, the performance of the manager and the Indices are not directly comparable. If applicable MSCI data is sourced from MSCI Inc. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, endorsed, reviewed or produced by MSCI. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.

All rights reserved. Issued by Investec Asset Management, September 2019.

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