How to prepare for more rate cuts and QE

The return of volatility to financial markets – as haven assets soar and risk assets wobble – is a timely reminder that it is far too early for central banks to declare victory in their attempts to boost global growth, stoke inflation and stave off deflation.

A dash by market participants to buy (Western) Government bonds, the yen, gold and the dollar, and fight shy of equities, reflects gathering concerns over growth and debt.

“A dash to buy (Western) Government bonds, the yen, gold and the dollar, and fight shy of equities, reflects gathering concerns over growth and debt.”


In the face of such worries, the US’s Trump administration is already clamouring for more interest rate cuts and talking of new tax cuts for good measure (in what some could see as an admission that the December 2017 tax package provided a short-term sugar rush but no more than that). The European Central Bank is still taking about lower interest rates and a return to Quantitative Easing (QE) and the Bank of England’s plans to hike borrowing costs are seemingly on hold.

Such policy ponderings are giving share prices some support, but ultimately they show that neither Governments nor central banks are sure of what the final outcome of a decade’s worth of unorthodox monetary policy (and in some cases fiscal stimulus) could be.

“Neither Governments nor central banks are sure of what the final outcome of a decade’s worth of unorthodox monetary policy could be.”


Any one of inflation, stagflation or deflation could yet be the outcome.

Four-pot plan

This leaves advisers and clients in a quandary.

  • The yield curve could be right and a defensive posture may be required, leaning on perceived haven assets such as bonds, gold or even cash.
  • The yield curve could be wrong. Growth may continue, central banks may panic and overdo additional stimulus, leading to inflation, especially if China and the US settle their trade tiff (even if that seems unlikely for now). In this case, bonds and cash could be bad places to be and equities a better option, if history is any guide.
  • We could get the worst of both worlds, with limited growth and rising inflation, taking us back to the 1970s when gold was the best performing asset and cash, bonds and stocks all struggled, especially in real terms.
  • Each possible outcome requires a different tactical portfolio response. As such, it may be worth researching how to create a portfolio designed to weather a range of economic and financial market outcomes, to protect wealth as well as try to create it.

    A few years ago, market strategist Dylan Grice devised a portfolio with the aim of doing just that, when he was at French investment bank Société Générale. This column has analysed his ideas before and it may now be appropriate to do so again.

    Inspired by the apparently indestructible nature of the cockroach, Grice looked at how to build an investment portfolio that would be just as durable as the doughty insect. He argued a pot split into four even parts between cash, high-quality bonds, income-generating equities and gold would have done the trick.

    This column has revisited this concept and tried to recreate the cockroach portfolio, starting with a £10,000 pot. To keep it simple, the equity income portion is represented by the Invesco Perpetual High Income fund, which has a good pedigree and a long-enough history. The 10-year Gilt is used for bonds, the spot gold price has been used in sterling terms, while the fourth element is covered by the Royal London Cash Plus fund. The portfolio is then rebalanced each year on 1 January to return to the four-way even split.

    The results over the past year are perfectly respectable: a 4.6% return (before any dealing costs, levies or taxes) with minimal volatility. If investing is all about going to bed and being able to sleep soundly, then this may be one way to achieve a little peace of mind.

    “If investing is all about going to bed and being able to sleep soundly, then this may be one way to achieve a little peace of mind.”


    A version of Dylan Grice’s ‘cockroach’ portfolio has performed steadily amid volatile markets over the last 12 months

    Source: Refinitiv data, with thanks to and inspired by Dylan Grice’s November 2012 piece for Société Générale, The Last Popular Delusions

    Test of time

    However, a year is hardly an adequate test for any portfolio. The next test is therefore to go back to 1991, again splitting a hypothetical £10,000 pot equally across the four portfolio constituents. This time the cash element is represented by the Bank of England base rate and the portfolio is rebalanced each year on 1 January.

    The end result, again before dealing costs, fees or taxes, is a pot worth £43,504 for a 5.2% compound annual return, a figure which nicely beats inflation. Intriguingly, the rebalancing seems to help. Without it, the portfolio comes to £41,168.

    A version of Dylan Grice’s ‘cockroach’ portfolio has performed steadily amid volatile markets over the last 27 years

    Source: Refinitiv data, inspired by Dylan Grice’s 2012 November piece for Société Générale, The Last Popular Delusions. Assumes annual rebalancing every 1 January. Data for 2019 runs to 19 August.

    Better still, perhaps, from the perspective of advisers and clients, is the limited volatility of returns. The rebalanced portfolio shows just five down years, although three have come since 2014, which offers a reminder that the past is no guarantee for the future. A low-growth, low-interest-rate, QE-riddled world is even testing the powers of the cockroach.

    “The past is no guarantee for the future. A low-growth, low-interest-rate, QE-riddled world is even testing the powers of the cockroach.”


    The ‘cockroach’ strategy will not suit everyone’s goals, target returns, time horizons and risk appetites. Yet the emotionless discipline of the rebalanced four-pot approach may give some investors pause for thought – especially as the historic returns have shown low volatility – and we may be about to witness a fresh round of unorthodox central bank action, even after a decade of such policies are yet to prove they can have the desired effect.

    AJ Bell Investment Director

    Russ Mould’s long experience of the capital markets began in 1991 when he became a Fund Manager at a leading provider of life insurance, pensions and asset management services. In 1993 he joined a prestigious investment bank, working as an Equity Analyst covering the technology sector for 12 years. Russ eventually joined Shares magazine in November 2005 as Technology Correspondent and became Editor of the magazine in July 2008. Following the acquisition of Shares' parent company, MSM Media, by AJ Bell Group, he was appointed as AJ Bell’s Investment Director in summer 2013.

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