In this instance, unfortunately it means different things to different people. In my view the only definition that counts is for multi-asset to be described as using as many non-correlated asset classes as possible. To maintain that it is just a mix of equities, bonds, property and cash is not doing it justice. It should have these asset classes and include at least commodities, absolute return and alternative return. Once appropriately defined there is a much better chance of understanding what it aims to achieve; to my mind this is simple, namely a real return through an investment cycle. The level of this real return should be measured in excess of inflation, as it is the real detractor from wealth, with the expected rate of return being dependent upon the risk the client is willing to accept. Using a multi-asset approach also has the theoretical benefit of reducing the level of overall volatility, when compared with equity markets.
The history of multi-asset investing can be traced back to the Yale and Harvard university endowment funds and those of family offices, where the protection of asset values and an insistence of a real return over a long-term time horizon were and remain the investment objectives. This style of investing is now available to the retail investor, and in my experience, may be attractive to the lower risk investor, where they prefer a sedate journey as opposed to a rollercoaster ride. In an era where risk profiling, suitability and know your client rightly drive client needs, the majority of clients, after assessment, turn out to be lower-risk investors. From a human nature perspective this makes sense: we have a limited propensity to loss, in fact it may well be asymmetric as we feel worse with the loss compared to better with the gain. Downside protection may well outweigh the potential for upside. Unfortunately expectations can be a double-edged sword, or in other words multi-asset investors cannot have their cake and eat it so investor expectations need to be managed. The style does not aim to produce equity-like performance in bear markets but the reverse is also true: in bull markets returns may look muted. Managing investor expectations in reality means re-educating the client to accept that a real return multi-asset approach should lead to lower upside volatility but also lower downside volatility, or in other words when equity markets are off to the races they should not expect 100 per cent correlation. A a reminder of the inflation plus benchmark and the time frame at this point (it is a medium to long-term investment horizon) is usually a good move.
The multi-asset investment approach for the retail investor can be offered through specialist bespoke discretionary fund managers or through a fund route. The former is available for clients with more substantial investable assets whereas the latter is available for those with more modest means. The bespoke route allows more flexibility with the client having a relationship with their investment manager who can tailor the multi-asset portfolio to their particular needs. Using a risk-rated fund allows the smaller client to access asset classes, which would normally be precluded to them on the basis of size and, to an extent, liquidity.
The past 12 months, while being a very short investment horizon, do highlight the positive qualities of multi-asset investing. The period has been prone to macro events that have either delighted or repulsed markets, leading to a bumpy ride.
Returns
Taking a very simplistic approach to multi-asset investing raises a number of points, the first being that multi-asset appears to smooth the return profile. It does outperform a real return benchmark over the stated period, although this will not always be the case over short time periods, and an active approach to asset allocation can provide value over an equally weighted approach. In my view the main driver of a successful multi-asset approach is skilled asset allocation.
This skill set was largely forgotten during the 1990s and into the first half of the last decade as investors were lulled into believing most assets only went up. The financial crisis put an end to that thinking and asset allocation was once again given the respect it deserved. In an environment where the risk rating of clients is now the norm, asset allocators have to be mindful of this when managing multi-asset portfolios. As the outlook becomes more benign one has to be mindful that despite an increasing level of optimism the risk profile of the mandate may well limit equity market participation. Again this goes back to managing investor/client expectations, or rather that the client should have a clear understanding of how their portfolio should perform under any given set of circumstances.
The year 2008 highlighted the importance of other asset classes: those invested in what were considered alternative assets, private equity, market neutral and currency had a greater ability to protect assets over the year.
Multi-asset investing, in my view, is now entrenched as a core offering to retail investors. In an environment where investors are becoming increasingly aware of return objectives and expectations based on rigorous risk profiling and suitability it offers a credible solution to client needs. With multi-asset investing, the journey is as important as the destination.
James Calder is research director of City Asset Management
“Multi-asset investors cannot have their cake and eat it”