Inside Schroders' inflation-beating 'sleep at night' portfolio

**James Marlay** (0:03)
Today on The Rules of Investing podcast, I'm speaking with Seb Mullins, who's the head of multi-asset and fixed income at Schroders. For many investors, a significant portion of their time in markets was against the backdrop of extremely low interest rates and abundant liquidity.
But that picture looks very different today, and I'm going to be asking Seb about what this changing backdrop means for an asset classes and how it flows through to building a diversified portfolio. Now, make sure you stick around as he provides a guide on picking the right tools at the right time to diversify your portfolio against those nasty shocks. My name is James Marlay and this podcast is brought to you by Livewire Markets. Seb, welcome to the Sydney Studio. Great to catch up.

**Sebastian Mullins** (0:46)
Thanks for having me, James.

**James Marlay** (0:47)
Now, I was recounting a story just before we got online about how I'm waking up in the middle of the night and checking my Bloomberg and seeing a crazy headline each day. There is so much going on.
It does make your head spin a little bit. My head would spin if I had to choose as many asset classes as you do, let alone siphon out some of that big picture noise. So I thought maybe just to start off with, to help give people a bit of a framework for how you think about going through the different layers of news down to asset classes. Imagine you had a clean sheet today. How would you start to filter through the information that we're receiving on the big picture and start to form an investment view?

**Sebastian Mullins** (1:30)
Great. Thanks, James. Right to the heart of it straight away. Yeah, let's get into it. I think the first thing is you shouldn't do that for your mental health, try and sleep. Believe that to people like me whose job it is to do that every day. But it's true, it changes all the time, and what you're focusing on can also change. I remember a few years ago when we had like 2022, first thing I did was check the bond market because that was the volatile instrument of the day. Normally, you check equities because that's where the risk lies and we'll see if it's up or down. Now it's like, what wall person on Twitter can I follow to tell me what's happening right now in the Middle East? It shifts every time depending what you're trying to focus on.
That can actually lead you awry, as you're saying. The more you have to look at, the more noise there is out there, the more you can actually get chopped around. To answer your question, how do you solve the blank sheet of paper? That's what we do every day. We don't literally sell the portfolio every day, but think of the process because we have a benchmark, we're absolute return investors, trying to get returns for a good level of risk. Every day, we look at the market fresh and say, where's the best forwarding opportunity in a risk-adjusted sense? The way we do it, our process is long story short, the VCL process. V stands for value, cycle, and liquidity.
Value is obvious. It tells you where opportunities lie, where the risks lie, terrible timing tool.
When they're at extremes, very useful in the short term, but normally, it's more of a guide to, well, here's where the pockets of opportunity or risks lie.
More recently, say the last 10 years, the cycle has been more important. Valuations, say US equity is always expensive.
Less so today, but have always been expensive. Cycles become more important, say the last five years. Where's the economic backdrop? Is every economy going through the same motions, or are they starting to diverge? If so, do you want to have more allocation to one country or the other? That sounds easy, but it's quite difficult to understand four-looking bases where different economies are going. Understanding the cycle is important because it tells you two things. One is how much risk do you want to take in that particular country? If you're heading towards recession, de-risk, essentially, but also where to take that risk. If you're into recovery, you want high yields, small caps, for example. If you're into a slowdown, you want high-quality tech names in your equity portfolio. So it tells you two things that come together across different cycles, sorry, different countries that's going on. More recently, liquidity has been quite important. Now, that's kind of a catch-all, like what's monetary policy or fiscal policy doing? What's investor sentiments? How's the market positions? What underlying currents are going on? For example, recently, we saw the Korean market blow up for about a month. Yeah, still doing very well, but for about a month.