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.
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.
More worryingly, the next market crisis might even be triggered by sharply rising bond yields.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.
And the universe is expanding. We believe a core role of a multi-asset manager is to look for those investable and high-quality assets that do behave differently from one another. The good news is there is a growing universe of regulated and accessible asset classes available.
Global loans, high yield bonds and emerging market debt can be good equity substitutes with comparable returns but lower volatility.
Assets such as renewable infrastructure, insurance-linked securities and absolute return can provide additional diversification with particularly low correlations to other assets. Blending a broader range of investments offers investors the potential to earn a higher return for the amount of risk they are taking. Which, ultimately, is what multi-asset is all about. It’s time to prepare for the future – it is time to diversify.
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Disclaimer and important information:
The value of investments and the income from them can go down as well as up and investors may get back less than the amount invested
To find out more about Aberdeen’s multi asset capability visit our website at: multimultiasset.co.uk
For professional investors and financial advisers only – not for use by retail investors
There is no guarantee that absolute return funds provide a positive return over any time period and capital may be at risk. Investors may not get back the full amount originally invested.
Emerging markets or less developed countries may face more political, economic or structural challenges than developed countries. This may mean that investors’ money is at greater risk.
Bonds are affected by changes in interest rates, inflation and any decline in creditworthiness of the bond issuer. Bonds that produce a higher level of income usually also carry greater risk as such bond issuers may not be able to pay the bond income as promised or could fail to repay the capital amount used to purchase the bond.
Where a bond market has a low number of buyers and/or a high number of sellers, it may be harder to sell particular bonds at an anticipated price and/or in a timely manner.
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