On mastering the complexity of multi-asset investing Martin Dietz PhD, Fund Manager, Legal & General Investment Management, stresses the importance of an informed decision: “Tactical asset allocation adds shorter term considerations (market positioning, sentiment, short-term forecasts on economic conditions and policy decisions) and can complement other information used.”
For Dietz knowledge of a portfolio’s wider funds is key: “An important consideration in a multi-asset fund is also whether active underlying funds reduce the liquidity and flexibility for the overall fund. Proactive portfolio positioning and active tail risk hedging, as discussed above, require up-to-date knowledge of the underlying exposures”
On navigating the changing economic landscape and the opportunities presented by multi-asset investing, Richard Batty, Fund Manager- Multi Asset, Invesco Perpetual, finds that four key themes have emerged for investors post financial crisis. With the first being, that “bonds have been overwhelmingly favoured as an asset class in recent years. Globally, data from EPFR show 60% of cumulative fund flows by institutional investors since 2003 have been into bonds.”
As economic growth remains sluggish and ‘risk-on/risk-off’ shifts persist there is a redirection of interest from bonds to equities as the favoured vehicle. In response Batty advocates the advantage of a broader range of asset classes with the multi-asset funds diversification as key. He states “Volatility is particularly interesting for diversification purposes because when equity markets rise, they tend to rise steadily and volatility is low; but when they fall, they fall sharply, and volatility tends to spike higher.”
On equities being the favoured asset class Evan Grace, Asset Allocation Portfolio Manager and Strategist, Wellington Management, states that total equity portfolio carries the greatest risks and volatility: “Our research shows that in a portfolio with a 60% equity/40% bond split, for example, more than 95% of the risk comes from the equity allocation.”
According to Grace, “Each asset class performs differently depending on whether inflation is rising or falling and the direction that economic growth is taking…”
Multi-asset takes this into consideration as Grace illustrates: “In a “normal” environment, weak-growth assets form 20% of the risk, stagflation assets 20% and inflation assets 10%. However, having the flexibility to significantly alter the size of these exposures is crucial because economic environments are not stable over time.”
The question is not whether to diversify but by how much, in the face of what changes and against what risks? Fiona Gillespie, Senior Investment Manager, Aberdeen Asset Management, emphasises that “the very nature of DGFs and multi-asset funds is that they are flexible in their approach, and while the fund exposure may “fit the bill” at the time of choosing, the structure is likely to change over time. The question is how accepting are the trustees to that change?”
According to Ian Richards, Chairman, Next Pension Trustees, “the most important driver is for trustees to look inwardly to make sure they know exactly what they need within their portfolio.” Richards expands with, “It is very easy to find that when a DGF is added, there is a greater exposure to assets within the total portfolio that have very similar drivers of return.”
For Alan Pickering, Chairman, BESTrustees, the right definition and benchmark is key to the multi-asset risk/diversification debate and, in many respects, varies scheme to scheme. “The smallest scheme of which I am a trustee is £50 million and the largest is somewhere north of £10 billion. The extent to which one diversifies beyond equities and bonds, and the way in which you do it, will vary a great deal…”
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