Multi Manager 2010 Outlook

Our patient is in remission but requires round the clock supervision

Coming into 2009 the global economy was very sick indeed, with the financial system still reeling from near collapse following the demise of Lehman Brothers. Having acted swiftly and decisively to prevent a systemic failure in 2008, central banks and governments were less clear about what to do next. However, once galvanised, they hooked up the global economy to a life support machine of unprecedented fiscal support and the patient began to stabilise. Fears of a 1930s style depression gave way to the more familiar realities of recession, a less scary proposition which, in turn, laid the foundations for recovery. But those foundations remain shaky. Only once the life support is fully withdrawn and the anaesthetic wears off will we have a clear understanding of the extent of the damage and the time required for rehabilitation.

The defining moment for investors in 2009 occurred in March, a month which saw markets reach a floor. From that point onwards, risk assets enjoyed a sustained rally that took us through to the end of the year. The winners were those investors who rotated their portfolio at that point, remained fully invested throughout, maintained exposure to Asia and were aggressive enough to "dash to trash", a speculative strategy accessing low quality, high risk investments such as high yield bonds. Few investors applied any of those strategies effectively and many remained stranded on the sidelines.

For our part, we had argued that the position at the start of the year had all the characteristics of an inverted bubble - replacing over-enthusiasm with extreme pessimism and overshooting on the downside. We were positive on equities, believing a return to pre-Lehman levels to be the most likely outcome for global stock markets, but were unsure as to when that might occur. We have now returned to those levels. We remained fully invested throughout the year, with a higher exposure to both equities and emerging market equities than our peer group average. As a result, our portfolios fully participated in the upside of the rally in risk assets. We did not however follow the "dash to trash", an approach at odds with our management style, and this did restrict opportunities to an extent, which meant that we did not outperform our peers by quite the same margin as we had in 2008.

The year ahead

The year ahead is less clear. Our patient is groggy. Economic indicators remain weak but at least they are positive. Corporate earnings are likely to drive any recovery but the question is how sustainable those earning prove to be. Both factors are enough to push markets on but there is an inherent vulnerability in this recovery. How markets react to the bad news, niggling problems or further shocks that will inevitably occur in 2010 will provide a better picture of where we are in the recovery phase.

There are plenty of opportunities for a possible relapse - China, ongoing monetary policy decisions, fiscal stimulus withdrawal strategies, inflationary pressures, the UK election, rising unemployment, all provide ammunition for the bears. To get the most out of 2010, investors will be required to work harder and be prepared to act swiftly to the changing environment. We are prepared for an interesting and challenging year but remain convinced that in such an environment, the multi asset, multi manager approach offers investors the best opportunity to ensure exposure to the winners that emerge out of 2010.