The report found the performance of global equities is to thank for the turnaround, which has come despite recession fears, increasing interest rates, a US bank crisis and the bailout of Credit Suisse.
Global equities saw a 7.7% rise in the first half of 2023, although Morningstar said this included a "sizable contribution from a fairly narrow subset of mega-cap US technology stocks associated with the artificial intelligence theme" and would therefore be of less benefit to managers underweight to growth, the United States and/or technology.
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Meanwhile, fixed income markets endured a mixed first half for sterling investors, with UK gilts down 3.5%, sterling corporate bonds down 1% but a 2.4% gain for GBP-hedged global.
This was still a far better environment for fixed income than last year, when UK gilts lost nearly 24% (giving back a decade's worth of gains).
Growth bounces back
Growth stocks were unloved in 2022 against the backdrop of high inflation and rising rates, but have come to the forefront during the first six months of 2023.
"Given persistent inflation, more rate rises and a gloomy economic outlook, it is perhaps surprising that growth equities performed so strongly in the first half of 2023," the report said.
The Morningstar Global Growth TME Index (in GBP) recorded a rise of 14.5%. Furthermore, the Morningstar Global Technology TME Index, which lost 24% in 2022, gained over 32% in the first half of 2023, in GBP terms.
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The report revealed that the rotations in equity market leadership from growth to value during the tail-end of 2021, and back to growth in the first half of 2023, has been reflected in multi-asset funds' contrasting performance.
For example, growth-leaning strategies Royal London Sustainable World and Liontrust Sustainable Future Managed Growth both ranked in the bottom decile of their GBP allocation 80%+ equity category in 2022 but in the top decile in the six months to the end of June 2023.
Comparatively, multi-asset funds with a value and/or income bent enjoyed tailwinds in 2022 but have had a more challenging time so far in 2023.
Despite the overall positive performance for equities, UK equities made only modest gains during the first half of the year.
Increased allocation to bonds
Higher inflation and major central bank hikes have seen a dramatic change in the landscape for bonds, with yields now considerably higher.
The US 10-year Treasury yield rose from around 1.5% to nearly 4%, while the UK 10-year gilt yield rose from around 1% to over 4%, which includes the huge spike in Q3 2022 following former PM Liz Truss' mini-budget.
This has presented an opportunity for multi-asset managers, which they have not been able to enjoy for more than a decade. Government bonds now offer a more competitive level of income than they did just 18 months previously.
As a result, there has been a notable increase in allocation to bonds. The report found that in the GBP allocation 40%-60% equity category, where a typical "balanced" fund resides, the average weighting to bonds was up to around 40% at the end of May 2023 from around 30% at the start of 2022.
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"For the GBP allocation 40%-60% equity category, an increase in overall bond exposure was achieved through managers adding to government bonds, but rising weightings to corporate bonds played a bigger part," the report said.
"Corporate bonds made up around 44% of the total bond allocation on average at the start of 2022 rising to 51% at the end of April 2023."
Morningstar said of the managers it has spoken with, investment grade bonds seem more attractive than usual, in spite of the likelihood of an economic downturn, citing that "companies are fundamentally in good shape and feeling that default risk was more than compensated by wider credit spreads, on top of a higher risk-free rate adding up to a compelling yield".
Managers were less positive on the outlook for high yield corporate bonds, however, generally viewed as more vulnerable in a weaker economic environment.
The report concluded: "While their views may differ on issues such as the likelihood or extent of a recession—or the future path of interest rates—managers on the whole see improved potential for bonds to offset equity losses in an adverse economic environment."