Allocators map the road ahead as markets shift and client needs evolve

In Queenstown, three seasoned asset allocators took to the stage at The Inside Network’s INZ: Investment Leaders Forum to share how they are framing the current market and positioning for what comes next. Escala Partners’ Tracey McNaughton, Mercer’s Rebecca Jacques and Viridian Advisory’s Piers Bolger approached the same question from different angles, but all agreed the environment is forcing a rethink of old portfolio habits.

Bolger’s first principle is to follow the macro. “The main one that we’re looking at is where the rate cycle’s going,” he said, describing it as the key signpost for growth and asset prices. While he acknowledged that equities are not cheap, he pointed to the strength in the US reporting season, with prices rising around six per cent and earnings surprises of more than eight per cent. “The results have been quite sound despite the backdrop of higher rates,” he noted. His base case is for the Federal Reserve to cut rates soon, but he warned the market’s direction will still hinge on the trajectory of growth, the jobs market and inflation. “There’s no single factor driving this,” he added, “but the rate path will shape everything else”.

Jacques steered the conversation to the currency arena, where she sees important shifts developing. She reminded the audience that the last change in the world’s reserve currency was after World War II, when sterling gave way to the US dollar, and that such transitions are rare and drawn out. “We’re not saying that’s where we are today,” she clarified, “but there is some pressure on the US dollar and no clear contender waiting in the wings.” She tied that pressure to geopolitics, a resurgence in gold buying, and the “other unknown” of cryptocurrencies. Her concern is that the dollar may no longer offer the same protection to foreign investors, prompting Mercer to rethink hedging levels and to view currency “as an alpha generator, not just a risk mitigator.”

McNaughton took a more structural view of the investment landscape, arguing that active management in public markets is fighting a losing battle. Citing the halving of listed US companies since the mid 1990s, the growth of passive to 51 per cent market share and an average investment horizon in listed markets of just seven months compared with seven years for private. “Companies can’t innovate when their capital supply is turning over every seven months,” she argued. Escala has halved its public markets resourcing and is putting more emphasis on private markets, where she believes skilled managers can make a visible difference to client outcomes.

Bolger pushed back gently, agreeing with McNaughton on the value of private markets but defending the role of listed assets. “I wouldn’t call the death of public markets,” he said. “Liquidity is critically important and one of the challenges in private markets has been illiquidity and whether you get paid for it.” He sees potential in evergreen private market structures that give advisers and clients continuous access without the capital calls and rigid timelines of traditional funds. These, he suggested, can “avoid some of the issues you’ve got around the liquidity framework” while still bringing the diversification benefits advisers want.

The discussion naturally moved to the 60/40 portfolio, long the default for balanced investors. Jacques said Mercer moved away from the simple split years ago, preferring more nuanced approaches on both the growth and defensive sides. “Our fixed interest portfolios tend to be a lot more expensive and a lot more complex than some of the equity side,” she explained. A particular focus has been the “revival of liquid alts” which are multi strategy allocations that, if designed with precision, can provide true diversification. “They let us play the commodities cycle better, and use currency as an alpha generator, not just a hedge,” she said. Risk budgeting, she cautioned, remains critical.

McNaughton’s own framework groups assets into three buckets. Fixed income is for liquidity, public markets provide cheap beta and occasional alpha, and private markets deliver illiquidity and more reliable alpha. “We don’t necessarily look for liquidity inside private markets, we balance it with fixed income,” she said. Duration risk is avoided, with preference given to shorter, more liquid fixed income holdings that can be called on when needed.

Bolger highlighted another layer of macro positioning, the yield curve. In his view, the US curve is likely to steepen as cash rates fall and the long end pushes higher, while in Australia the curve could flatten. These shifts, he said, could challenge parts of the equity market, influence the dollar, and create valuation opportunities in emerging markets. “Local currencies look reasonably attractive,” he added, “and that could change the leadership within equities”.

Some of the most engaging moments came when the panellists discussed unconventional asset classes. McNaughton revealed Escala is researching “sports adjacent” investing, in businesses such as Hawk Eye which provides ball tracking at major tennis events. “It’s sticky, it’s uncorrelated, it doesn’t matter where we are in the cycle,” she said. “People are loyal. They will spend on merchandise and on their sports team.” She noted that the idea has resonated particularly with younger family members in multi generational client relationships.

Jacques described Mercer’s thematic approach as deliberately sidestepping the temptation to pick direct winners in fast moving sectors like AI. “We don’t try and predict exactly where AI is going,” she said. “Our skill set is recognising where a theme or opportunity is emerging, and then figuring out how to tap into it in a more controlled way.” Often, she added, the better opportunities are in the infrastructure, resources or services that enable a trend.

Bolger concluded with a structural perspective on separately managed accounts. For advisers, he said, SMAs can boost efficiency, scalability and practice value, while giving clients better tailored portfolios. But he argued that platform technology is holding back their potential. “The platforms haven’t caught up with the investment piece or what advisers want,” he said, pointing to the inability to integrate data feeds or execute trades with the efficiency seen in other industries.

Philosophical differences were clear. McNaughton believes the future for alpha lies firmly in private markets, Bolger insists public markets still matter, and Jacques focuses on broadening the toolkit and exploiting overlooked return drivers like currency.

Still, there was shared ground on key principles. All three see the need for thoughtful integration of illiquids, genuine diversification beyond equities and bonds, and an unblinking assessment of the risks embedded in every allocation.

The Queenstown conversation underscored that asset allocation today is less about finding a single right answer than about adapting to constant change. Capital markets, policy settings and client expectations are all in motion. As McNaughton put it, if clients can get their public market exposure “by paying four basis points for a VTS, why do they need you?” For advisers, the challenge is to answer that question, and to build portfolios that prove the value of their judgement.

Laurence Parker-Brown

Laurence Parker-Brown is head of content at The Inside Network and managing editor of The Inside Adviser and Investor Strategy News.