Multi-assetSep 12 2016

Delivering through dynamic allocation

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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.

“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.”

Increased investor demand and the associated different client needs accelerated the evolution of multi-asset away from a traditional approach Meike Bliebenicht, HSBC Global Asset Management

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.

“An effective portfolio has the two elements evolving and working together. In years like 2015, 2011 and 2008, taking meaningful asset allocation decisions to reduce risk has helped defend clients’ capital through stressful markets.”

With asset classes moving in cycles, and macroeconomic factors sometimes hindering performance, adapting to changes such as lower interest rates means understanding the correlation between asset classes, and not just adding positions for the sake of it.

Mr Ramjee adds: “The relationship between assets is not stable. Understanding these relationships helps one understand that diversification needs to be active. Different managers will provide different services – some will reduce volatility at any cost, that cost likely being returns. Others understand that growth is often a requirement for investors.

“We want to avoid disastrous outcomes, but a degree of risk is required to generate growth returns. Our role is to understand the most appropriate way to generate that growth, being mindful that cycles will turn, and that protection against volatility is required.”

With central bank policy continuing to diverge, it is no surprise multi-asset funds remain popular, with the latest IA statistics showing mixed-asset products were the third best-selling grouping in July with net retail sales of £195m.

Ms Bliebenicht concludes: “Increased investor demand and the associated different client needs accelerated the evolution of multi-asset away from a traditional approach with allocation driven by historical returns, to the flexible multi-asset investment solutions we employ today.

“Since the financial crisis, the focus on achieving good risk-adjusted returns has increased, and today’s multi-asset solutions aim to deliver through dynamic asset allocation, driven by prospective return assumptions and considering allocation and management of investment risks in the portfolio, rather than return alone.”

Nyree Stewart is features editor at Investment Adviser