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The volatility suffered by financial markets over the past year has served as a harsh reminder that the value of asset classes does not always go up. However, investors understandably still want good steady performance from their investments with as little risk as possible. Faced with the need to meet investors’ requirements and uncertain market and economic conditions, fund managers have one of the toughest jobs ever on their hands. A multi-asset investment strategy based on flexibility, diversification and conviction can provide a way for managers to overcome this challenge.

If a multi-asset strategy is to be successful, a fund manager must expand his horizon beyond the traditional realm of equities, fixed income and cash and be able to embrace the range of asset classes at his disposal. Indeed, fund managers have never been better equipped than they are today to generate performance in a volatile market environment. Thanks to the amended non-Ucits legislation, retail investors can now benefit from non-traditional products, such as senior secured loans, which until recently were the mainstay of the institutional arena. Senior secured loans offer attractive risk/return profiles and high levels of security, as they rank first in the event of a default. They also deliver consistent returns in excess of cash. Although the asset class is exposed to credit risk, senior secured loans are favourably valued and their cash-like returns provide diversification rewards. Such assets have little correlation with conventional equities and bonds, meaning the manager of a multi-asset portfolio can achieve greater diversification of the fund’s risk profile without compromising performance.

Direct investment in property is now an option for the manager of a multi-asset portfolio. Unlike property shares, which expose investors to more stockmarket risk, investing in bricks and mortar can boost performance and also limit volatility as they are lowly correlated with the equity market. Despite the uncertain short-term outlook for property yields, the long-term attraction of this asset class lies in its secure income stream, which has historically grown in line with or in excess of inflation.

The manager of a multi-asset portfolio could also enhance diversification by investing in convertible bonds. These products allow managers to participate in equity market gains while curtailing their exposure to losses. What is more, this asset class provides superior risk-adjusted returns compared with equities and bonds.

In contrast, equity hedge funds and private equity do not offer the benefits of diversification for a multi-asset portfolio. These types of investments have produced strong returns over the past four years, but they merely amplify a portfolio’s equity exposure. They are not in the spirit of a cautious, diversified and low-risk portfolio, and therefore do not meet the needs of risk-averse investors.

At the same time, the manager of a multi-asset portfolio must be able to find the best ways to reflect his investment views and implement these how he sees fit, through internal funds, external funds or direct holdings, for example. If a manager expects the agricultural sector to continue to perform well due to rising commodity prices, he should have the freedom to invest in those funds that he thinks will give the portfolio the best possible exposure to this structural trend, whether they are managed internally or not.

Besides having the tools and flexibility to build a diversified portfolio, a fund manager must be able to back his convictions. After all, correctly predicting which asset classes will outperform and then having the freedom to act as dynamically on investment decisions as possible, could significantly improve the manager’s ability to achieve above-average returns with minimal risk. Returns from the major asset classes have varied markedly over the past 10 years. Focusing on equities and limiting exposure to fixed income in this time would therefore have given a fund manager an undeniable advantage. Why should a fund manager not have the ability to change his asset allocation accordingly and fully back his conviction in an asset class he believes is more suited to today’s background of slowing economic growth, such as shorter-dated government bonds?

If a fund manager cannot support his investment choices with conviction, a multi-asset strategy will start to lose its impact. Many fund managers of multi-asset portfolios practise “tilting”. Although they do move asset class weightings around, they are restrained by a pre-determined portfolio framework. In our opinion, such a rigid portfolio structure could be detrimental to a fund where asset allocation is the key driver of performance. Instead, a manager should be able to back his choices with belief. Only then can he overcome less-than-favourable market conditions, while giving investors access to top-performing asset classes together with balance and diversification through other areas of the market.

Risk management also has a key role to play in the running of a multi-strategy portfolio. Regular discussions with risk analysts, who keep track of holdings, performance and risk levels, can improve the structure of a portfolio, enabling the fund manager to maximise investment returns for a given amount of risk.

Of course, investing competently across a range of asset classes and instruments requires significant expertise. This is where a large asset management house with skill across equities, convertibles bonds, fixed income assets, property, senior secured loans and risk can provide an edge. The fund manager of a multi-asset portfolio needs a realistic idea of what to expect from each asset class in terms of risk and reward and he can only develop this knowledge through easy access to experts in each of the areas in which he is investing.

For some, the words diversification, flexibility and conviction fly in the face of the term ‘low-risk investment strategy’. Yet today’s volatile market conditions and investors’ lack of appetite for risk with an unquenched thirst for solid returns have shown that a multi-asset investment process incorporating these qualities is crucial. By diversifying across asset classes, having the flexibility to swiftly adjust this asset allocation and backing up investment decisions with 100 per cent conviction, there is no reason why fund managers should not be able to satisfy investors’ desire for good performance with minimal risk.

David Jane is manager of the M&G Cautious Multi Asset fund