Delivering through dynamic allocation

This article is part of
Investing in Multi-Asset – September 2016

Delivering through dynamic allocation

Multi-asset could be considered the latest evolution in investors’ search for a balanced portfolio and diversification of returns.

Previous incarnations saw funds of funds become the most popular option while distribution portfolios, initially constructed for insurance assets with a mix of equities and fixed income, could be seen as the forerunner to the current crop of multi-asset options.

Meike Bliebenicht, senior product specialist for multi-asset at HSBC Global Asset Management, points out: “Multi-asset is a young asset class, with the first multi-asset funds launching in the UK in the mid-1980s.

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“In the early days, multi-asset typically referred to benchmark-centric strategies, with asset allocation often only diversified across developed market equities, government bonds and cash.”

But she notes that in subsequent years, with the investment environment evolving and liquidity in niche asset classes improving, multi-asset funds’ investment universe has broadened.

For example, a search for funds with multi-asset in the title on FE Analytics offers up more than 100 options from the Investment Association (IA), many of them part of a range of multi-asset products targeting a particular risk spectrum.

Ms Bliebenicht adds: “Emerging market equities and emerging market debt started to form part of a multi-asset portfolio, as well as alternative asset classes such as property or private equity.

“The global financial crisis increased the focus on multi-asset investing as investors had become acutely aware of the need for portfolio diversification to spread investment risk. While multi-asset was previously an approach primarily used by retail investors, smaller to medium sized institutional investors and pension funds started to show interest in diversified strategies.”

This increased interest has helped drive the asset class’s evolution, as have regulatory developments such as pension freedoms.

In the wake of George Osborne’s pensions announcement in the March 2014 Budget, the number of multi-asset income-focused portfolios has increased.

Around 20 funds now explicitly aim to provide multi-asset income for investors, partially in a bid to tap the retiree market.

But the key driver for the growth of multi-asset funds, and the reason why they remain so popular after unexpected events such as the Brexit decision in June, is the diversification of a portfolio into more than just traditional assets.

Shaniel Ramjee, co-manager of the Pictet Multi Asset fund, explains: “You don’t need to have too much risk if you have the risk in the right places.

“We seek to diversify the portfolio in different ways at different times, tailoring that diversification for the growth assets we may have at the time and the exogenous risk to financial markets at any particular time. Being active in your choice of diversification is as important as being active in your growth allocation.