How to find prime assets in a changing world

Investing is multi-dimensional. If you look at opportunities solely through the lens of traditional asset class exposure, you will see a one-dimensional world where opportunities will be reduced and risk will be simplified: the worst of both worlds.

Take the UK equity market, for example, which is seen by some asset allocators as a single market.

We believe that the environment is positive for some of the big UK companies with overseas earnings, but much less so for some of the domestic-oriented companies, due to post-Brexit uncertainties.

Those businesses with an overseas bias are much less impacted by Brexit and are benefiting from a materially weaker sterling, which gives a fillip to their earnings.

Globally diversified

Furthermore, they tend to have attractive yields, a scarce commodity in a low-yield world, and decent exposure to some of the areas we favour, such as the emerging consumer.

The broad environment for emerging markets has become more forgivingIt's a similar story for our continental European positions, where the underlying exposure is again dominated by overseas earnings and ticks some of our theme boxes, such as new energy and demographics. Meanwhile, we have zero exposure to Japan.

In short, we've side-stepped some of the big uncertainties around specific economies and their policy makers, for example around the timing and impact of Brexit on the UK economy, and invested instead in globally diversified earnings streams.

Viewing emerging markets as one asset class, and one that is still a high-growth play driven by the Chinese commodity boom, is also unhelpful.

The broad environment for emerging markets has become more forgiving, with the US dollar moving sideways, commodity prices enjoying something of a rebound and US interest rate rises delayed.

Attractive exposures

Indeed, there are signs of better economic data in China, Russia and Brazil, some of the bigger emerging markets that were struggling. Strong emerging equity, bond and currency market performance has reflected this.

We could have just bought broad-based exposure to emerging markets but we prefer to be more precise.

We have numerous unrelated exposures rather than being single-scenario dependentFor example, we have exposure to the Indian consumer, benefiting from the effect of a decent monsoon for the first time in three years, and a more defensive play to a number of Brazilian utilities and Mexican airports.

Importantly, these exposures are attractive also because what influences them is very varied. For example, the Indian consumer has little in common with Brazilian utilities.

That's not to say that a major risk-off event wouldn't damage them both but in most scenarios we can consider them fairly different risks. Indeed, it's the precision of the exposure that allows this diversification.

To sum up, a big part of how we look at risk is ensuring we have numerous unrelated exposures and are positioned for a range of scenarios, rather than be too single-scenario dependent. You shouldn't use a sledgehammer to crack a nut.

Anthony Rayner is a multi-asset fund manager at Miton.

This article was originally published by our sister magazine Money Observer here

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.