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Multi asset: Experiences may vary

25 Nov 2021

Multi asset investing can mean different things to different people. Andrew Holt looks at what investors need to know.

The financial crisis of 2008 was a great advert for multi-asset strategies. In the aftermath of the crisis, when yields were low and volatility was rising, such funds proved their value as many suffered limited losses despite the turbulence in markets. Indeed, it seems investors could not get their capital into these funds fast enough with around $3trn (£2.1trn) handed to such managers as the crisis took hold.

But that was then. Over the past decade, multi asset has moved from the en-vogue style of investing to a strategy facing some serious questions.

“Investor experiences have varied over the past decade given the loose definition of what it means to be a multi-asset fund,” says Lloyd Thomas, a portfolio manager at Border To Coast. One of the issues with multi asset is the range of approaches on offer. “It is a broad church, with wide ranging strategies covering anything from absolute return to passive allocation funds,” Thomas adds. “And there are also big differences in the level of equity market sensitivity on offer, meaning individual experiences can vary.”

Complex strategy

Assessing multi asset from an asset owner perspective, Thomas spots a few issues. “There are two main concerns when evaluating multi-asset strategies,” he says. “First, the high bar to performance. Given most multi-asset funds aim for equity-like performance while holding a large exposure to non-equity assets, this aim will always prove challenging.”

The second consideration is the strategy’s complexity. “To avoid traditional income streams the fund manager will naturally search for alternative sources of return,” Thomas adds. “These alternative streams of return often result in greater complexity. This can make multi-asset strategies harder to monitor and to evaluate performance.”

It is here that multi asset can present challenges to investors, as the implementation of such strategies varies: from baskets of equities to a fund-of-funds approach. Some use a strategic asset allocation while others are tactical or dynamic.

Although these are evident issues that need careful consideration, the definition of a multi-asset investment strategy can be as it promotes itself, combining multi assets: stocks, bonds, real estate or cash to create one big, but nimble and, importantly, diversified portfolio.

The idea being a simple one: that by balancing asset classes this can achieve particular investment outcomes, such as growth, income or risk minimisation.

Strong investment

As a result of these solid investment principles, institutional investors have long regarded multi asset as a strong basis to build their own investment approach, based on their own particular needs.

“Multi-asset investing has proven popular, as it aims to provide equity like returns with significantly lower volatility, and diversification is key to achieving this,” Thomas says.

“To be able to smooth the return profile of multi-asset funds, a manager can expand the number of sources of returns in the portfolio – for example, by introducing exposure to new and emerging sectors, such as technology or infrastructure, that may not be highly correlated to broader equity and bond markets,” he adds.

For Maria Municchi, a multi asset portfolio manager at M&G Investments, the type of strategy is important, where for her a tactical asset allocation is an important part of the mix. “For a multi-asset solution, carefully considering strategic investment decisions is only one pillar to generate returns over the long-term,” she says. “It is also important to be able to respond to short-term investment opportunities through tactical asset allocation decisions.

“Often bouts of volatility, which materialise as excessive bearishness and bullishness, are not driven by a genuine change in the economic backdrop, instead prices may detach from fundamentals for reasons that are behavioural,” Municchi adds. M&G’s philosophy remains focused on observing market prices and on making a judgement if investors are acting emotionally rather than objectively assessing the economic environment.

“Whenever we identify a mispricing caused by investors’ irrational behaviour, we respond by rebalancing our portfolios through changes that can be tactical in nature,” Municchi says.

In search of diversification

The increased need for flexibility and dynamism is becoming even more important in the current environment of the low yields available across asset classes. Furthermore, as equity and bond markets are expected to deliver lower returns during the next five years than in recent periods, there is a potential warning here that will have a knock-on impact on multi-asset portfolios.

So much so that multi-asset investors face the prospect of needing to increase levels of market risk, set against a background of falling returns for equities and fixed income.

It is in this way that multi asset has also been an approach open to change, given the evolving investment environment. Diversified growth funds are multi-asset funds that grew out of the global financial crisis and changes to regulation. There has also been a recent trend of creating multi-asset themes based on new technological or infrastructure developments.

“These developments are driven, in part, from the change in the relationship between equity and bonds,” Thomas says. “Generally, this is an inverse relationship which sees bonds rally when equity prices fall.

“However,” Thomas adds, “as bond yields have fallen – driven lower by central banks providing liquidity to the system via quantitative easing – they have become a less attractive way to o set equity market volatility. This weaker convexity forces managers to search further a eld for diversification.”

Sustainable force

Offering another perspective on the changes in multi asset, Municchi says: “Thematic investing has gained a central role in the proposition of the fund management industry thanks to its increasing popularity over recent years. However, we think sustainability is the true underlying force driving the shift, and with it a focus on investments that belong to the information technology and infrastructure sectors.”

Covid has also had an impact on the developments in multi-asset strategies, with a sustainable twist. “Since the pandemic started, we have assisted to an acceleration in the change of consumers’ habits and preferences that is focused on favouring a more sustainable economic growth in the future: companies enabling technological innovations and helping the energy transition have been considered among the winners. But they are not alone,” Municchi says.

Like much else in the investment world, there has been the introduction of responsible multi asset with the growth of ESG investing, and possibly, in the most unlikely of places. The China Minsheng Bank backed Minsheng Multi-Asset ESG Global Allocation index is a case in point. It is China’s first global multi-asset index with an ESG criteria embedded. As with everything associated with ESG, this is inevitably going to be a growth area.

“Another notable development that confirms how sustainability should play a central role in our clients’ portfolio, is the effort by governments worldwide to considerably increase their investment plans for better and more efficient infrastructures, which will generate several investment opportunities,” Municchi says.

And here there is possibly big growth in the G as well as the E and the S, of ESG in multi asset. Municchi says: “As multi-asset investors and asset owners we have the opportunity to play an active stewardship role across multiple asset classes. Our sustainable investment approach introduces new perspectives to analyse each opportunity with the two-fold goals of providing attractive returns and over the long-term having a net positive impact on the environment and society.”

The long-term outlook being vital here, for multi-asset strategies to adjust. “The long-term horizon is important to allow companies enough time to transition and to achieve their sustainable objectives, and for those companies without a clear transition plan to steer their management strategy,” Municchi says.

“In the latter situation we, as an asset owner, are given a crucial role as stewards and could be part of a company’s journey by actively engaging as shareholders with the management, by increasing awareness on environmental or social issues, or by participating in the voting process on corporate resolutions,” Municchi says.

A dose of Covid

There has also been the matter of Covid. How have multi-assets strategies fared during this time? One immediate thought is if they could swim in the chopping waters of the financial crisis then the storm of Covid should have proved an easier sea to navigate.

This has proved to be the case, at least for some strategies. Unsurprisingly, multi-asset funds with a greater allocation to technology have sailed through, dominating the best performing funds of all type over the past three years, proving effective not just during Covid, but also pre and post the Covid lockdown period.

“With multi-asset funds over the past 12 to 18 months, we have seen a lot of in ows, and, in fact, now the assets are roughly equal to those in the xed income funds, which is fairly remarkable,” Morningstar fund analyst Bhavik Parekh says. “But having said that, the last quarter was the lowest in ow since the middle of last year. So, slowly, interest has been wan- ing, but is still pretty strong,” adds Parekh. Morningstar’s data ultimately concludes that multi-asset funds generally deliver a good investor experience.

But the positive multi-asset outlook during Covid is not true across the whole picture. “The broad nature of multi-asset strategies suggest that investors will have likely experienced varied results,” Thomas says.

“While predicting the Covid crisis was impossible and would have likely caught funds with equity market exposure off-side, the subsequent rapid rally would have been equally problematic to capture the upside,” Thomas adds. “That said, multi-asset strategies with less directional exposure would have bene ted from the elevated volatility environment.”

But research from one consultancy during the summer found that in the seven years to 2020, £30bn was wasting away in third or fourth-quartile multi-asset fund products over consecutive five-year rolling periods. This accounted for a fifth of all multi-asset funds.

On this issue, one researcher said: “Multi-asset funds were meant to o er the best of both worlds by allowing participation in equity markets but without the same level of volatility – and ultimately risk.

“Some funds have done this – capturing much of the upside when markets rise and providing a good degree of protection when markets fall. However, many have not, consistently lagging their peers,” they added.

Growing alternatives

One trend seen in multi asset during the pandemic was a greater diversification into alternatives. Is this trend likely to continue? “Adding alternative assets, with their proven low correlation with traditional asset classes, is an effective tool in the multi-asset manager’s armoury and is a general trend that we expect to see continue in overall strategic asset allocations for institutional investors,” Thomas says.

And while Border to Coast is not involved in setting the overall strategic asset allocations, it has witnessed a growing interest in alternative assets in the pool, where sectors such as infrastructure, real estate and private equity are increasingly attractive due to their uncorrelated nature to broader equity and bond markets.

“They offer the diversified sources of return needed to build resilient portfolios that can provide a buffer against market volatility and offer long-term returns,” he says.

Asset owners are exploiting multi asset in its various forms. The £30bn Brunel Pension Partnership launched a multi-asset credit fund to gain exposure to a diversified portfolio of enhanced credit opportunities with modest-to-low exposure to interest rate risk is one example.

Brunel’s senior investment officer, Daniel Spencer, says: “The portfolio is very different from our other portfolio offerings, enabling our clients to reduce risk while still achieving reasonable returns through the use of diversified credit.”

With the on-going challenges facing the market, multi asset could well o er a route out of the more challenging scenarios. A point made by Thomas: “A multi-asset approach to investing can allow for a flexible management approach with the ability to adjust and adapt, which can prove valuable in a more volatile market environment.”

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