In an environment of rising interest rates and increasing market volatility, the role of multi-asset investing is evolving, says Nikko Asset Management's Tanuj Dutt.

Identifying assets that tend to behave differently at any given time is the starting approach of most multi-asset portfolio managers, according to Dutt, the Singapore-based managing director and senior portfolio manager of Nikko's Global Multi-Asset fund.

While there is a commonly-held assumption that fixed income and equities will always be negatively correlated, he notes that this can turn positive. This can limit the effectiveness of multi-asset approaches simply as a substitute to higher weightings toward either bonds or stocks.

"We are nearing the end of the credit cycle…you really need to think about what is going to be the next generation of multi-asset.

"A lot of our thinking is around what can we do to make multi-asset more robust, to improve the downside risk characteristics," Dutt says.

He believes cost controls are particularly important in the current environment: "Multi-asset returns going forward are going to be lower than in the past, so you also want to make sure your costs are going down too".

With an expectation that China and India are among two leading global growth stories, his team's Singapore location could be a considerable advantage.

"Here you have markets with higher real yields together with political stability, and virtually no risk of default," Dutt says.

In this context, he believes "having experts in China's renminbi probably makes sense," and points out his team has had "a much more constructive view on China for more than a couple of years".

Nikko also holds positive views on India and Japan, and on a smaller regional market, Vietnam.

"Vietnam is a key part of China's One Belt and One Road initiative," Dutt says. Though the country currently has a highly-concentrated securities market, comprising around five or six companies along with an exchange-traded fund, the number of listed companies is tipped to grow substantially in coming years.

Dutt's team is less bullish on more developed equities markets. "US equities are expensive, you can't get too excited about them at the moment. But one thing that has kept us overweight here is the earnings growth, though we like equities less than we did last year," Dutt says. He expects 2018 earnings growth in the range of 15 to 20 per cent.

In terms of fixed income, he says: "If you had to own bonds, we favour those from Australia and some of the emerging markets…though we are pulling back on credit exposure, which is a non-consensus view, for sure, particularly in steering clear of high-yield credit."

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Glenn Freeman is a senior editor at Morningstar.

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