Time to diversify

Time to diversify

To deliver the right risk-reward balance, multi-asset funds need to be positioned for the future, not the past.

The concept of multi-asset investing is certainly not a new one and there are now a plethora of multi-asset funds for investors to choose from.

But looking at the portfolios of many multi-asset funds, it’s clear they are still run with traditional ‘balanced’ strategies, focusing on mainstream bonds and equities first and foremost.

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Such approaches may have worked well in the past. But in today’s markets we believe a different, far more diversified approach is needed. Here's why:

Listed equities losing their core status. Even in so-called multi-asset portfolios, it’s not unusual for equities to be the only growth asset.

Equities have certainly had a good run since the depth of the global financial crisis (central banks have been particularly supportive with their regular bouts of quantitative easing) and we still believe that global equity markets can provide some good investment opportunities in coming years.

It requires a greater leap of faith, however, to think that they are going to be immune from the political and economic uncertainty that we find in the world today. 

The world’s largest investors no longer rely on equities as their sole growth asset; in this market environment we don’t think that multi-asset funds should either.

Bond yields can’t go much lower. Unpicking investment returns over the last 10, 20 or 30 years, it is clear that bonds have been almost as good a source of growth as equities.

Yields have fallen from over 10% in the early 1990s, to close to zero today, providing the tailwind for a 30-year bull market in bonds. The strength of historic bond performance will have been a pleasant surprise for many balanced funds – but how can bonds contribute the same performance over the next 30 years?

New diversification is needed. It’s often assumed that bond and equity values don’t move together so rises in one will always compensate for the other. But there have only been two periods when five-year rolling returns for US equities and US government bonds have shown a negative correlation: 1955-1965 and 2001 to the present day.

In other words, the anomaly is not when bonds and equities move in the same direction, the anomaly is when they don’t. If bond yields are too low to provide meaningful returns in today’s environment, they may also be too low to provide meaningful protection in more challenging times. More worryingly, the next market crisis might even be triggered by sharply rising bond yields.

Given this backdrop, it’s perhaps not surprising that many investors are seeking new opportunities in asset classes whose returns are not dependent on equity or bond markets.