The only "free lunch" that investors will ever get is the ability to significantly diversify their portfolios, according to Legal and General Investment Management's (LGIM's) Justin Onuekwusi, who said the high number of small positions across his portfolios was the key reason his portfolios have performed well during the Covid-19 crisis.
Onuekwusi, who is head of retail multi-asset funds at LGIM, said "portfolio diversifiers" were indiscriminately sold off alongside equities and bonds during the week running up to 23 March, as lockdowns started to be implemented across the globe.
As such, he used the opportunity to top up these positions, having trimmed his equity exposure from neutral to negative.
"At the start of the year, our [equity] positioning was quite neutral, then the stockmarket crash very suddenly happened on 19 February and our outlook and subsequent asset allocation shifted from neutral to negative. We were exposed to some of the very early falls in markets, but we managed to cushion a lot of it, which we are happy about," he said.
"But then, we had a short period between 13 March to 23 March when diversification stopped working. This is when we saw fears of a credit crunch can starting to materialise and every single asset class was sold off indiscriminately."
One of the most significant market dislocations Onuekwusi witnessed in March was among high-yield bonds, where ETFs were trading at 15% discounts relative to their net asset value. He topped up portfolio exposures to the asset class, alongside REITs, infrastructure assets and emerging market debt, which "sold off far more than you would ever expect in a downturn".
"Then, we saw significant stimulus from central banks across the world, and that was really when markets started to work again and liquidity made a comeback. High yield, REITs and infrastructure bounced back significantly," he added.
Positioning for a recovery
While the debate was previously how sharply markets were going to fall, the manager said the next consideration is when how fast the economic recovery will be.
"Are we going to see the economy recover in 2021, or are we going to see permanent scarring where the economy is not going to recover for a significant period of time? Currently, markets are pricing in the first scenario, and our view is pretty evenly split between the two," he explained.
In order to capture some upside in the event of the first scenario unfolding, Onuekwusi has been increasing the portfolios' exposure to equities via European autos, US small caps and tech names.
The European auto equities and US small caps reside in a ‘laggards' bucket that the manager has put in place across each of his five multi-asset index funds, as he feels the gap between company fundamentals and valuations is markedly dislocated.
"While UK small caps also look okay, the US is a more liquid market. Also, the performance of UK small caps can become dominated by currency movements, which is difficult to navigate as Brexit continues to unfold," he reasoned.