Multi-asset managers have been dodging bullets since crisis

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Multi-asset managers have been dodging bullets since crisis
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This week saw Psigma’s Tom Becket make one of his typically forthright analyses, this time about the risks of many multi-asset portfolios.

His contention is that many of the diversified assets contained in a typical portfolio of this nature are effectively one trade and that trade is exposed to interest rate, inflation and bond yield risks in a concentrated way as a result.

The central case from Mr Becket is that interest rates will be around 2.5 per cent in three years’ time which would mean at best very uninspiring returns for those supposedly diversified, cautious investors.

But a bearish scenario with developed world central banks losing what reputation they have as credible inflation fighters, leading to a cycle of rate hikes would, of course, be much worse. He also repeated his extremely sceptical view on giant illiquid, ‘unnimble’ bond funds, querying how they can really meet the challenge of trying to play credit themes and manage duration while owning many billions of assets.

The answer from Psigma is to seek out assets that will behave very differently including asset backed securities, gold and even emerging market equities while of course avoiding those giant corporate bond funds and replacing them with specific mandates.

One has to ask though, as the non-normal continues, whether the investment industry has dodged a few bullets since the financial crisis

Yet it all challenges notions of what cautious really means. Obviously we have long abandoned the terms when applied by the IA and ABI and replaced them with percentages of equities and bonds, though the new percentage-based labels strike me as being of very little used in this persistently abnormal environment. But that isn’t quite my point. If we decide to accept that Mr Becket is correct, what mechanisms do we have to translate his views across the market?

Obviously, advised clients could benefit. Such information and views may be fed into the mix in various investment committees that govern advised and discretionary decisions, to be accepted, rejected or perhaps partially taken on board. But with the latest APFA report suggesting yet another surge in execution-only business to 67 per cent of product sales, one wonders how easy such views would travel out to the wider investing public.

There is also the fact that a huge volume of market noise is about the next hour, day or perhaps at most, with an election looming, the next few weeks. One also has to wonder what it means for cautious income seeking retirees and their plans.

What would be really good to hear is whether those who offer such portfolios based on such diversification strategies have a counter argument. The alternative might be that those funds, if not quite steering investors on to the rocks, aren’t really doing them many favours - a cautious strategy isn’t meant to lock in losses.

There are also challenges here to the increasingly dated modern portfolio theory, though we have known that since the financial crisis started. One has to ask though, as the non-normal continues, whether the investment industry has dodged a few bullets since the financial crisis, given reasonable bond and equity performance. Maybe the industry and its investors are not bullet proof after all and we are about to find out.

John Lappin blogs on industry issues at www.themoneydebate.co.uk