According to Damien Hennessy, head of asset allocation at Zenith Investment Partners, the recent shift in macroeconomic risks demands a renewed focus on diversification and active investment strategies.
Speaking at a media briefing on Tuesday, Hennessy noted that while a recession is not his firm’s base case, the risk has risen significantly.
“We’re not in that camp that says that a recession is the main case. But it’s a risk,” Hennessy said.
He elaborated that only a month ago, the primary concern was that the Federal Reserve might pause rate cuts in response to stronger-than-expected growth and an uptick in inflation.
“That’s clearly changed … flipped towards a recession.”
In this uncertain backdrop, active management is regaining relevance, particularly in small-cap equities, long-short strategies, hedge funds, and mid-cap stocks.
“Our recent review of our strategic asset allocation highlighted that active management strategies are gaining renewed relevance, offering alpha opportunities,” he said.
Crucially, he cautioned against over-reliance on bonds as a hedge during market turmoil.
“Portfolio diversification also remains crucial, with bonds not to be totally relied upon in all scenarios, instead seeking diversification through opportunities in short-duration credit, loans, gold, commodities and infrastructure,” he said.
“I think one of the key takeaways for us from a portfolio construction point of view is that you shouldn’t look for bonds to save you in periods of market turmoil,” Hennessy added.
He noted that despite rising recession concerns, bonds have not rallied as expected in a traditional risk-off environment.
“They’ve treaded water,” he said.
Hennessy noted that the case for a soft landing is looking increasingly shaky, with key data painting a complex picture.
“You always think you’ve covered most environments … But this one seems a little bit different for the policy uncertainty that’s prevailing at the moment,” he said.
He pointed out that such uncertainty has reached levels seen only three times in the past 25 years, including during COVID-19.
The key challenge to the soft-landing outlook is tariffs, once seen as a policy tool, but now raising concerns after US officials warned of collateral damage and Trump shifted focus away from markets.
“The anticipation and implementation of new tariffs are already influencing economic data,” Hennessy said.
“Notably, imports surged ahead of the tariff rollouts, which has led to significant downward revisions of Q1 GDP forecasts. Federal job losses have begun to take hold, consumer and business confidence is wavering, and new orders may also be facing headwinds.
“The potential spillover effects on financial markets could tighten conditions and impact near-term growth.”
Instos turn towards active management
Also speaking at the media briefing, Chant West senior investment research manager Mano Mohankumar noted that funds are shifting back to active management after a period of heavy reliance on passive strategies.
This move to passive, he said, was influenced by the Your Future, Your Super performance test.
An example he gave is Brighter Super, which after previously reducing its exposure to active management, recently announced a return to active strategies.
While welcoming the shift to active management, Mohankumar acknowledged the appeal of passive strategies in an environment where equities performed strongly.
“While we were critical at the time, if you look at the end result, it probably benefited those funds,” he said. “Going passive in international equities probably worked out.”
In a recent analysis piece published on InvestorDaily, Robert Almeida, portfolio manager and global investment strategist, MFS Investment Management, emphasised that active management is regaining importance in 2025 and beyond as market volatility and economic uncertainty challenge the dominance of passive strategies.
He highlighted that while passive investing thrived in bullish markets, active management is now better positioned to capitalise on market inefficiencies, navigate complex economic conditions, and implement tactical asset allocation to enhance returns and mitigate risks.
