Karen Watkin from AllianceBernstein is our Fund Manager of the Month
30 OCT, 2024
By Jose Luis Palmer from RankiaPro Europe
Karen Watkin is Senior Vice President and Portfolio Manager for the Multi-Asset Solutions business in EMEA at AllianceBernstein (AB). In her role, she manages AB's All Market Income Portfolio and oversees the development and management of multi-asset portfolios for a diverse range of clients.
From 2008 to 2011, Watkin led the management of Index Strategies Group, where she was responsible for creating and managing AB’s custom index strategies for institutional clients across EMEA. She joined the firm in 2003, after three years as a management consultant in Accenture's Capital Markets Group. Based in London, Watkin holds a BA in Economics with European Study from the University of Exeter and is a CFA charterholder.
Why and how did you decide to go into the financial sector, did you have other vocations?
When I first graduated, I started my career as a management consultant at Accenture, working within their capital markets group. This meant my clients included investment banks and asset managers, and I quickly realized that I found the work they were doing far more interesting and exciting than my role as a consultant.
Making the move to asset management, I found my home in multi-asset investing. With a background in economics, I appreciate that this area of investment management allows me to continually focus on what is driving the global economy, while digging deep into research to understand how this connects across asset classes.
What is your view of the current macroeconomic environment and how might it affect Multi-Asset Solutions?
With the Federal Reserve initiating its easing cycle in September, monetary policy easing continues to gain momentum as inflation approaches target levels. Central banks normally cut rates to support struggling economies. This time, however, they’re normalizing exceptionally tight policies as the post-pandemic inflation spike fades. In fact, economic growth appears robust, especially in the US, where it has been slightly above trend, underpinned by strong household consumption and sustained modest growth in business investment.
We think multi-asset income strategies and the balance they provide can offer a compelling opportunity in today’s market environment. With a soft landing as the base case, strong nominal growth, fading headwinds for corporate margins and more parts of the market are now seeing upward earnings revisions, we believe there may be room for further equity upside and, importantly, a broadening out of recovery. Meanwhile, credit and corporate bonds also tend to do well in slower but non-recessionary environments. High yield credit, which is often a meaningful part of multi-asset income strategies, offers compelling all-in yields that are close to their highest in a decade, while fundamentals and balance sheets remain robust for this stage in the cycle.
Finally, while we think the backdrop is constructive for risk assets, we do think there is more uncertainty on the horizon. After a period of fairly benign market volatility this year, we think August was an early taste of more risk to come, and with the US elections nearly here, volatility is likely to continue to rise over the coming months. With risk likely rising, the diversification offered by multi-asset strategies can make them particularly compelling—especially those with the flexibility to shift across and within asset classes.
How should investors orient their portfolios in this environment?
Given our base-case forecast for a soft landing, maintaining more exposure to equities makes sense in a multi-asset income strategy. However, we think investors should also be looking for opportunities to rotate. Since early 2023, we’ve made the case for a tilt toward large cap, quality growth stocks. We still see a core role for these, but richer valuations and a lofty earnings bar tilt the balance of risks toward other segments.
We see scope for earnings growth to broaden as growth moderates and the rate-cut cycle picks up steam. Defensively oriented equity segments have lagged during a dominant period for mega-cap tech, but they have a chance to catch up—while offering potential downside mitigation, should the economic picture unexpectedly deteriorate.
Small caps rallied in July after trailing large caps for a long stretch, and we see more potential upside from rate cuts and political tailwinds if a change in US leadership increases a domestic focus. But prudent sizing and selectivity are key, since small-cap indices include many unprofitable, low-quality companies highly levered to economic conditions.
Expectations for rising volatility and possible market turmoil mean that diversification should be a point of emphasis. This suggests a more balanced approach in equity allocations will be important, while bonds play a big role, too. High starting yields bolster income potential and, in our view, could cushion against potential volatility. The case for bonds is stronger with inflation cooling and rates likely to follow, which could boost returns.
What differentiates the AllianceBernstein Multi-Asset Solutions from the others and what advantages can it bring to an investor’s portfolio in the current scenario?
One key area in which our multi-asset income strategies stand out is our approach to dividend investing. As income investors, we naturally lean towards higher-dividend stocks, but we recognize that focusing purely on this part of the market can bring with it unintended style and sector biases – particularly now.
For instance, the share of companies paying dividends above 2% has declined from 60% 10 years ago to 40% today– and these tend to be more concentrated in defensive parts of the market, like staples, or in countries like the UK. These are both areas that have lagged materially in the recent period when growth has been better rewarded.
With our dividend strategy, we look to take a more balanced approach. This means we include more growth-oriented companies alongside dividend payers, which enables us to still capture a yield advantage versus the broader market, while also having the potential to deliver more upside and provide smoother returns.
What macroeconomic data is most important to monitor in order to manage investment funds? What do you consider most important when including a company in your portfolio?
As a multi-asset investor, I am focused on top-down decisions to select the broad exposures I want to bring together in my Portfolio, both across and within asset classes. I seek to identify the asset classes, sectors, styles and active strategies to meet both our long-term objectives and tactical needs.
We believe it’s important to build a resilient strategic asset allocation by looking at expected performance across a range of business cycles and economic environments and combine this with more tactical asset allocation decisions in response to changing market conditions, by forecasting volatility and correlations to gauge when markets may be more vulnerable to large drawdowns.
We look at the core pillars of growth, inflation and monetary policy, looking at current levels and direction of travel to understand the economic environment. We also consider capital market factors such as valuations, fundamentals and technicals to assess the investment opportunities and risks.
Individual company selections are identified through in-depth bottom-up research of our different equity and fixed income teams. Whether the analysis is top-down or bottom-up, for each investment it’s critical to identify: the role it is playing in the Portfolio (return, income, diversification), the risk it is expected to contribute and how it is expected to perform in relation to the other investments in the portfolio.
What ratios does a company have to meet to be part of your portfolio? How is AllianceBernstein’s stock-picking process structured?
We don’t have specific ratios that need to be met in order for a company to be included in our portfolio. Instead, we prefer to look across different company characteristics depending on the role the investment is playing in the portfolio.
For example, we look for companies with higher dividend yields given our income objectives, while also looking to complement these with companies that can provide room for greater capital appreciation, such as larger cap US stocks which tend to have more of a growth flavour.
At AllianceBernstein we have a wide range of active equity strategies to tap into, each of these with its own set of ratios and fundamental metrics according to their investment style and philosophy. This might lead to a greater focus on growth metrics such as ROA, stability measures such as earnings variability, or valuation metrics such as free cash flow or dividend yield.
What do you like to do in your free time?
With two sports-mad sons, most of my weekends are spent cheering them on from the sidelines of their respective rugby or football matches. When I do get some time to myself, I love to do Pilates – it’s a chance to build my inner strength and a calm mind, both helpful qualities as a fund manager!
