“Betting everything on one outcome generally is not a well-diversified approach”: Chris Eddy – 10X Investments.

SIMON BROWN: I’m chatting with Chris Eddy. He’s head of Multi-Asset Funds at 10X Investments. Chris, I appreciate at the time. Tactical allocation – actually a colleague of yours, Chris Rule, mentioned it a week or two ago and how it’s not something on his list. It occurred to me that I’ve been to a bunch of your presentations in the last year or so and you talk about a lot of things – not tactical allocation. But I suppose let’s first start off with a sort of definition of tactical investing.

CHRIS EDDY: Hi, Simon. Thanks for having me on. From our perspective, tactical asset allocation is really all about trying to express a market view over a short term, so really very much taking a directional view. If we’re talking in an asset-allocation sense of an asset class, kind of saying over the next three months we think the rand is going to be stronger, or over the next six months we think SA equities are really going to sell off, what we can see from that is that it’s very binary in nature in terms of over that short-term time period you are going to be either right or wrong with that view, and consistently trying to get that call right with all the surprises markets throw up over the short term is really difficult.

SIMON BROWN: You’re probably going to get it right a few times; consistency’s going to be the problem. And then, as I understand, at 10X – and of course you’ve got the CoreShares ETFs in that stable now – you do slight tweaks, but they’re much more a longer-term view. Broadly you want equities, you want bonds and you’re not going to suddenly say, let’s go very aggressive SA Inc.

CHRIS EDDY: Well, I don’t know whether that’s entirely true because I think equally in terms of not necessarily believing in the value that tactical asset allocation can add to a portfolio construction process over the long term, we also don’t believe that a strategic asset-allocation approach is static, and that if you follow a strategic approach, you can’t change your asset allocation in response to changing market environments, because the reality is that markets are not static.

If you look at our strategic asset-allocation approach, just at a very high level, what we do is we generate medium-term return expectations for asset classes over the next five to 10 years, and those return expectations are very much impacted by the price that you pay today. And then what we try to do is to build portfolios that deliver the best risk-adjusted returns based on the investment objective you’re looking to achieve.

So if you follow that line of thinking through, material changes in the market environment today will impact forward-looking return expectations, and as a result you should see a significant change in your strategic asset allocation if there is a material change in the market environment. If there isn’t a material change in the market environment, then you wouldn’t expect changes in your portfolio either.

SIMON BROWN: I take your point. Let’s use the US as an example, where we’ve seen – let’s take it up to the end of ’21 – a spectacular run in US markets. That price you’re paying, which is an elevated price by all metrics, simply suggests the next five or 10 years are going to be less spectacular.

CHRIS EDDY: That’s right. Spot on. So let’s build on that example a little bit. If you’re saying, okay, my view is that US equity markets are going to sell off materially in the next six months, so I’ll go short and try to monetise that view. That’s an expression of tactical asset allocation.

But if what you’re saying is, you know what, based off current valuations, the long-term return expectations over the next five to 10 years are looking materially lower than other asset classes available, and as a result I’m now down-weighting US equities with that five- to 10-year view, the impact on your asset allocation today could actually be the same. But it’s the driver behind the process which for us really determines whether it’s tactical in nature or much longer term and strategic in nature.

SIMON BROWN: And what is important here, perhaps, is you wouldn’t take the US, for example, to zero. You really are tweaking at the edges more than anything.

CHRIS EDDY: That’s right. Very much within the ultimate confines, because at the end of the day you’re trying to deliver specific outcomes for clients, and ultimately betting everything on one outcome generally is not a well-diversified approach to minimise the risk of achieving that outcome. So [it’s] very much altering the asset allocation to ensure more consistency of returns and more predictability of outcomes, but very much taking into account the current market environment we find ourselves in today.

SIMON BROWN: You’ve mentioned a couple of times now the sort of five- to 10-year time horizon, which is classic long-term investing. I was always taught anything under five years can be considered short. That almost in a sense kind of smooths out that process. What I mean by that is something that’s happening today we quite possibly forget about in a month or six.

CHRIS EDDY: That’s right, that’s right. However, I think what you’re trying to do – and I think you’re spot on – is that you really are trying to incrementally change the portfolio and adjust to changes in the current market environment and valuation, rather than taking this sort of stepwise approach that certainly can bring significant market-timing risk into the equation.

SIMON BROWN: We’ll leave it there. Chris Eddy, head of Multi-Asset Funds at 10X investments, I always appreciate the insights.

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