Multi-asset  

Age-old allocation

Investment portfolios were often based on traditional and historical structures of which seemingly few had changed over the decades. The range of assets was very straightforward as judged primarily by the stockbroking models used by both the stockbrokers and discretionary managers at that time. A balanced portfolio would often be 80 per cent in equities, with some gilts added, along with possibly a corporate or property bond – and not forgetting that unit trust popped in to cover the rest of the globe. Why such a structure? Well the clue is in the name. We were brokers of stock in those days.

Practise

To this you could add the normal trading practises of around 20 purchases and 20 sales a year. This, of course, would normally fulfil your expectation to have provided around 40 commissions over the year and thus in all likelihood entitle you to a bonus. Cynical? No, I used to sign the cheques.

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As for the intermediary world, this usually seemed to follow a similar asset allocation as laid out so perfectly by the old dogma of the insurance company ‘stochastic’ models of asset allocation (or was that sarcastic?), which provided a rigid structure for the adviser just to pop in their favourite funds du jour.

Thus such a structure ensured that any market correction would affect all across the board, but of course who could be criticised? After all they had all followed the hallowed dogma.

Around the turn of the new century, some participants disgruntled with this approach broke away and looked to bring in, if not new ideas, then at least previously little-considered concepts in the retail world. And so Markovitz’s ‘new portfolio theory’, although not new, would have a radical effect on the structure of many portfolios and, in due course, many businesses.

This introduced far greater diversity of assets into the allocation. The aim was not just for diversification of risk but also to try and manage volatility. From this we saw the burgeoning of the multi-asset portfolios, not just as a range of fund of funds, but rather using a far more considered approach to portfolio construction as opposed to simple asset allocation dogma and last year’s top-performing funds.

Once the concept of broader multi-asset portfolios seemed to receive greater acceptance, it was then time for the advent of the specialist fund managers. These would often be smaller houses – not the big brand name fund houses, but those capable of bringing greater focus to investment areas previously bundled together into larger sections of asset classes like emerging markets.

A particular area that had been frequently ignored was that of currency investment and risk. Currencies were not seen so much as an asset class in themselves but rather as a more volatile and dangerous risk to what could otherwise have been a well-diversified global portfolio. One dramatic movement in sterling and all the good work had gone to waste. Here then was where we saw the introduction of currency hedging starting to enter the mainstream as multi-managers’ portfolios could bring this institutional discipline through to the retail market.

Illustration

For ‘multi-manager’ you could read ‘multiple active managers’. The range of multi-managers could be best illustrated by a series of Venn diagrams of all the similar fund managers they all used in varying proportions. The only exception seemed to be when just their own in-house funds were applied.