Alessio de Longis spent the last three months loading up on risk in his $1.1 billion Invesco Global Allocation Fund. Now, he’s winding down those positions and reversing course back to safety.
(Bloomberg) — Alessio de Longis spent the last three months loading up on risk in his $1.1 billion Invesco Global Allocation Fund. Now, he’s winding down those positions and reversing course back to safety.
The senior portfolio manager, whose flagship fund has beaten 80% of its peers this year, is changing tack after a flurry of hotter-than-expected economic data fueled expectations that Federal Reserve officials will keep raising rates for longer. Amid souring investor sentiment, de Longis is ditching stocks for bonds and turning less bearish on the US dollar.
His new positioning underscores the flight-to-safety that has permeated markets in recent weeks as Treasury yields skyrocketed and stocks unwound their January rally. With the Fed Funds rate now expected to top 5.4% by July 2023, compared with a peak of 5% priced in at the start of the year, de Longis is no longer convinced any such respite from the central bank is coming soon.
“We’re back to where we were in the summer, where inflation was surprising to the upside and the Fed was communicating quite clearly, ‘We are not done yet’,” de Longis, who has led the Global Allocation Fund since 2019, said in an interview. “We spent the last three months hoping for a pause, for a signal of a pause.”
While Invesco’s Global Allocation Fund has returned about 5% this year through Friday, putting it ahead of peers like the T Rowe Price Global Allocation Fund, American Funds Global Balanced Fund and BlackRock Global Allocation Fund Inc., de Longis has still lagged the 5.7% gain for the S&P 500 Index.
His team is now bracing for another 75 basis points of hikes from the central bank, up from a 50 basis point estimate at the start of the year. They are once again underweight stocks relative to bonds — after positioning for the opposite since the start of December — and have moved to neutral exposure on the greenback from underweight. In fixed-income, they’re betting on duration, favoring investment-grade and government bonds.
“The policy repricing due to these inflation shocks is enough to warrant repositioning portfolios in a defensive way,” said de Longis.
For a while, de Longis’s view that a soft landing could be on the way seemed to be paying off, especially as risk assets rallied at the beginning of the year, and his fund climbed nearly 7% in January.
Then, cracks began to emerge. The University of Michigan’s index of consumer sentiment came in stronger than anticipated in early February — a signal that pricing pressures were not abating as quickly as expected, de Longis said.
But the data release that ultimately caused Invesco’s models to price in further tightening and jolted de Longis toward a defensive stance in March was the latest reading of core personal consumption expenditures. “We know it’s one of the most important statistics to the Fed,” he said. “And it showed inflation was not coming down and actually was printing above expectations.”
Although still underweight stocks, de Longis is sticking to developed equities outside of the US, particularly in Europe, as the slowing of geopolitical risks in the region present more upside relative to the US. He is leaning away from financials, industrials and materials stocks, while favoring health-care, staples and technology stocks that have “defensive characteristics” like large profit margins and strong balance sheets.
Within the bond portion of his portfolio, he’s underweight riskier sectors like the high-yield market, as well as emerging markets debt.
“Equities are not priced for a recession,” he said. “And if inflation stays, if policy needs to stay tighter for longer than initially assumed, recession risks go up. Which means that equities are less priced for that than bonds are.”
–With assistance from Isabelle Lee.
(Updates with Invesco fund’s relative performance in second paragraph)
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