Paul O'Connor, head of multi-asset at Henderson Global Investors, has said dealing with politics will be a major challenge for his team during 2017 as he believes it will be a "huge driver of financial markets" for the first time in a generation.
The manager (pictured) said even though he has a constructive macro outlook, markets this year will have to contend with two big regime shifts; the policy environment and global political change.
He said: "We are in the middle of a significant change. The current generation of investors has been exposed to a number of economic and financial crises, but few have been exposed to political crises within markets.
"We enter this year with event risk being extremely elevated in terms of politics. We need to try and work out what will come of Brexit, we need to understand what President Donald Trump's administration will be about and how China and Russia will react to that, we need to contend with elections throughout Europe and other issues in the Middle East."
O'Connor said there will be a number of events throughout 2017 which could "dominate market pricing for weeks or even months".
He added: "Macroeconomics are still fairly conventional but the political stuff is something we have never seen before. It is not implausible to think we are entering the most violent era in terms of political turbulence for many decades."
As a result, the group's multi-asset managers have positioned their portfolios to best play these events, taking the view active management will add value in this kind of environment.
O'Connor said: "We are at a stage in the cycle where passive [investing] becomes more dangerous, particularly where credit is concerned. We do not expect the space to be violent but it is right to be defensive."
The team has also reduced its property exposure: "We still think property is a great diversifier but we substantially reduced our weightings over a year ago because it had become very crowded. It is also extremely vulnerable to any concerns around Brexit."
Instead, the team are finding opportunities - and diversification - through absolute return funds, commodities and holding cash (see chart, above, for latest breakdown of the flagship £486m MM Income and Growth fund).
O'Connor commented: "We have some exposure to commodities through equity funds but are looking to rotate more decisively in that direction this year.
"It is the one asset I feel has moved very quickly with the Trump trade and an area I expect we will be adding to over the next few months as prices drift back a little.
"We want to move out of precious metals like gold, which we own directly, and into more cyclical commodities."
