Predicting investment markets has always been difficult but with so many macro\-economic and political factors affecting the direction of markets, investors are at a loss. Whether it is Brexit's effect on European and UK stock markets, the US Federal Reserve's impact on bond pricing and yields or China's economic slowdown having a knock\-on effect on global growth, investors are finding that single\-strategy fund predictions are nigh on impossible. What might seem like a good investment one year turns out to be a rotten one the next. But rather than continuously switching from fund to fund, many investors \- both professional and retail \- are considering the merits of a diversified, multi\-asset portfolio. And while there are management and trading costs involved in managing a widely diversified portfolio, the broad spread of investment risk in a multi\-asset fund aims to help smooth out the turbulence over time and create a more balanced ride for the investor.

Headwinds, tailwinds and market shocks: how multi\-asset funds aim to ride out macro\-economic turbulence.

Fund managers seem to be facing a raft of macro\-economic headwinds at the moment. Investment commentators cite issues such as muted global growth, increasing levels of government and consumer debt and expensive equity markets as just some of the obstacles to performance from single\-strategy funds. As Patrick Connolly, chartered financial planner for Chase de Vere comments: It seems fund managers face far greater headwinds than tailwinds at present. Globally there are some serious concerns. A few years ago, the Chinese growth story was driving global markets forward, but its recent slowdown has been presenting economists with a muted outlook for this erstwhile powerhouse of economic growth. In the US, according to Lee Robertson, founder of the Investment Quorum, there is a growing early disenchantment with the White House, which may yet spook markets, although this has not been greatly evidenced so far, despite the press coverage. Moreover, there is the prospect of tighter US monetary policy. Multi\-asset duo Ian Barrass and James de Bunsen, managers of the Henderson Alternative Strategies investment trust, opine: Recent comments from the Federal Open Market Committee members suggest the Fed will increase interest rates in June and further over the coming years. The Fed has also begun discussing a reduction in the size of its balance sheet. While President Trump has struggled to pass any significant reforms since taking office, it is likely he will continue to push for corporate tax reform and increased infrastructure spending. As a result, they believe, any reform could end up increasing the US deficit, if savings are not found to subsidise the lack of tax revenues and increased spending. This would encourage the Fed to tighten monetary policy at a faster pace to counteract possible overheating caused by fiscal policy late in the economic cycle, the pair add. Trevor Greetham, head of multi\-asset for Royal London Asset Management, comments that global growth overall is looking a little less positive than it did in 2016, both for equities and bond markets. He says: We are optimistic on multi asset returns over the next year but dont expect a repeat of 2016, which saw a surge in stock and bond returns as markets factored in the consequences of looser Bank of England policy and a weak pound. Heading into the summer, the upswing in global growth is coming off the boil and inflation pressures are easing. This is good for bonds but stocks may not take bad news on growth kindly after a good run. Mr Greetham adds that a lot is riding on the performance of one of the fastest\-growing economies, namely China: The optimal mix depends on China. If recent tightening measures there take effect going into 2018, slower growth should lead to a drop in commodity prices but global stock markets should continue to benefit from loose monetary policy. If, however, China continues to accelerate as it has over the last year then commodity prices and emerging market equities could see a further large rise. But aside from Trumponomics, slowing global growth, a sluggish Chinese economy, a tougher market for fixed income, ongoing political issues in the Gulf or nuclear testing in North Korea, Mr Connolly says macro\-economic problems are plentiful enough on the UKs own doorstep. He explains: We have important European elections in the UK, Germany and Italy and then uncertainty over the whole Brexit process. The reality is that it is incredibly difficult to predict the outcome of macro events, and even more so to forecast the effect on investment assets. Indeed, this was demonstrated clearly with the market performance of the FTSE 100 and FTSE 250 immediately after the EU referendum in June 2016. On the day of the result, 24 June, the FTSE 100 closed 3.2 per cent down. The FTSE 250 finished 7.2 per cent down and Euro Stoxx 600 closed down 7 per cent. The concern at the time was whether this shake\-up could signal the start of a protracted market downfall. Yet in May 2017 the FTSE 100 has reached record highs, with the mid\-cap market also performing strongly.

> It is incredibly difficult to predict the outcome of macro events, and even more so to forecast the effect on investment assets

So is this a sign of things to come, with the upcoming UK General Election and the long Brexit process? Mr Robertson is not so sure. In respect to Brexit, an overweight position towards overseas assets might be prudent, he cautions, given that sterling is likely to suffer further if the UK, as predicted, suffers from a hard Brexit. **Tailwinds** But despite concerns over Brexit, Trump and China, overall economic growth has been relatively good. This means those investors who reacted negatively to any perceived headwind with knee\-jerk decisions, perhaps ditching UK equities for other asset classes, may have missed out on valuable tailwinds over the past year. Meike Bliebenicht, senior product specialist for multi\-asset at HSBC Global Asset Management, admits that current valuations in equity markets may seem less appealing than in previous years and may have less of a buffer to absorb disappointing news.

> We see an environment in which investors need to temper their expectations

However, she calls recent global growth solid. Therefore, investors who have been shying from equity markets over the past year have only hurt their own returns. She explains: The macro\-economic backdrop has been improving substantially over the past 12 months and global economic growth momentum remains solid. The International Monetary Fund \(IMF\) forecast for global growth is 3.5 per cent for this year the fastest rate in five years if the IMF is correct. For example, Ms Bliebenicht points to eurozone PMI rising to 56.8 per cent in April, with manufacturing expanding at its fastest pace in six years. She says: The improving economic activity has also started to feed through to corporate earnings. So while there are definitely headwinds, there are also pockets of strong activity. This means if investors continually flee from haven to haven, putting all their money into one or two single\-strategy funds or asset classes every time they do not like what a certain market is doing, they not only risk being stung by a potential problem down the line but also risk missing out on strong performance. **Risk v return** While multi\-asset funds may help to provide the necessary diversification that smooths out the turbulence caused by headwinds while taking advantage of the tailwinds, there are various factors investors should bear in mind when looking for a multi\-asset portfolio. Ms Bliebenicht says all multi\-asset funds need to consider the objectives of the investors, and pay close attention to the long\-term risk targets of the end investor. For this reason, she does not believe it is right for multi\-asset fund managers to seek higher\-risk assets just to generate performance. Our funds are managed to long\-term risk targets and investors expect them not to drift away from these risk budgets over the long\-term. We certainly expect future returns from riskier asset classes to be in positive territory, but they will likely be lower than what we have seen in the past. Due to the elevated levels of uncertainty in markets, and the fact valuations are no longer as attractive as, say three years ago, we do not think it is the right time to take large, tactical positions in either direction, Ms Bliebenicht adds. We see an environment in which investors need to temper their expectations, add Mr Barrass and Mr de Bunsen. Future returns in equity markets will be driven by earnings growth rather than multiples expansion, and returns in bond markets will be driven by carry, rather than yield compression. **Alternatives** Bond and equity investment, therefore, seem to be on course for lower returns over the next few years, according to the managers. Therefore, many multi\-asset managers advocate looking to alternative assets to provide diversification and ensure lower correlation between portfolio holdings. Mr Barrass and Mr de Bunsen explain: We see an allocation to alternatives as attractive for multi\-asset portfolios. Arguably low yields and high multiples have been supported by easy monetary policy following 2008, the gradual removal of such support could put pressure on equity and bond market valuations. A second side\-effect of this is that we may see periods in which government bond markets and equity markets move in the same direction, reducing the diversification benefit that investing in both asset classes has traditionally provided. We therefore feel an allocation to alternatives adds valuable diversification to multi\-asset portfolios, they add. Mr Robertson agrees. He says: In recent times, multi\-asset funds have already been looking to, or are, investing into alternative strategies that are less correlated to equities and bonds. Infrastructure plays, gold bullion and aircraft leasing are investment areas that have already been exploited by some managers, as interesting investment areas to capture both capital and income returns.

> We certainly expect future returns from riskier asset classes to be in positive territory, but they will likely be lower than what we have seen in the past

However, Mr Connolly suggests advisers consider whether their clients would be happy making too many alternatives plays, as this could increase the risk or cost for the end investor. He says: While there may be scope to look at alternative asset classes, and some might have merit in the right proportions, if managers move too far away from mainstream assets, they are likely to be accepting potential downsides, such as increased volatility, limited liquidity or high charges. **The right balance** Headwinds, therefore, are plentiful but not necessarily insurmountable. Tailwinds look strong so far but cannot always be depended upon to stand the test of time. Alternative asset classes may provide excellent diversification but add to the cost or risk. So what should investors be doing? Simply put, leaving complicated asset allocation decisions to the experts, according to financial advisers. Mr Connolly says: The reality is that it is incredibly difficult to predict the outcome of macro events and then even more so to forecast the effect on investment assets. Nobody knows which asset classes will perform well, particularly in the short\-term, which is why most investors should be spreading the risks. In this challenging environment, the best approach for most investors will be to adopt a multi\-asset strategy as they diversify in order to spread risks. This will mean investing in a combination of higher\-risk assets, such as equities, and perceived lower\-risk assets such as fixed interest, for a degree of capital security. Mr Greetham is adamant investors should not pursue risk for its own sake. He says: The multi\-asset funds we manage aim to beat inflation over the long run by balancing riskier growth assets like stocks, property and commodities against lower volatility bonds and absolute return strategies. All of the asset classes we include make sense and all have been tested through good times and bad. We are nervous about relatively new asset classes, such as peer\-to\-peer lending, that appear to be low risk and high return. There is no such thing as a free lunch and some of these areas will run into difficulties if and when interest rates finally rise. So if a portfolio is truly to be multi\-asset, there has to be finesse: how will these asset classes fare, when all the various macro\-economic elements are brought to bear on the portfolio?

> There is no such thing as a free lunch and some of these areas will run into difficulties if and when interest rates finally rise

The idea, according to Mr Barrass and Mr de Bunsen, is to consider all the potential headwinds when constructing a portfolio. They argue while many single\-strategy funds may struggle to navigate the outcomes of any of the above events, multi\-asset funds are well structured to take advantage. This is because of their ability to allocate to the most suitable asset classes for a particular macro environment. Ms Bliebenicht says there should be no bias to the investors domestic market, to enable investors to benefit from global investment opportunities and spread investment risk. Moreover, as Mr Connolly explains, a multi\-asset fund manager is also better able to invest for capital protection, as well as capital growth. He comments: For many multi\-asset managers, the focus should be on diversification to spread risks, and on capital protection. Most people invest in multi\-asset funds because they want to achieve some level of capital protection, and not because they want to take bigger risks. Ultimately, according to Ms Bliebenicht, it is up to the adviser to carry out regular reviews of how the portfolio is performing and meeting the clients investment and risk objectives. She adds: Regular reviews of asset allocation are important in any market environment, and more important than ever at the moment. _Simoney Kyriakou is content plus editor for FTAdviser.com_

View from Royal London Asset Management: How will multi\-asset funds perform in the year ahead?

_Trevor Greetham, head of multi\-asset and lead manager of Royal London Asset Managements Global Multi Asset Portfolio \(GMAP\) range, provides an overview of key considerations for investors._ Last year was the best year for multi asset returns since the initial recovery from the financial crisis in 2009, with many funds posting double\-digit returns. There were three drivers: first, a pick\-up in Chinese growth boosted the global economy and raised stock prices worldwide. Secondly, and counter\-intuitively, the immediate impact of the UKs vote to leave the EU was positive, with a sharp drop in sterling raising the value of overseas investments and benefiting foreign earners in the UK equity market. Last but not least, the surprise election of Donald Trump increased expectations for tax cuts and spending programmes in America. Multi asset funds are largely a sum of their parts. They never do as well as the strongest asset class they hold, or as badly as the weakest. However, there is scope for additional value through active stock selection and tactical asset allocation. We see a positive outcome for multi asset funds in 2017, but not as positive as last year. While the global economic backdrop is positive for equities in the medium term, there are signs that growth in China is starting to peak, and the pace of the recovery elsewhere in the world may be easing off. Geopolitical stress could also rattle investors, and we wouldnt be surprised to see a period of volatility over the summer, with markets starting to worry about a relapse into the sluggish growth of recent years. However, with inflation low and year\-on\- year measures likely to drop into year end, wed expect policy to be eased where necessary, and this should keep returns on an even keel. We have been overweight equities in the RLAM multi asset funds for most of the last five years, but have scaled back positions closer to benchmark weights, heading into the summer.

> In contrast, we believe multi asset funds should continue to offer a positive real return

With monetary policy loose and central banks likely to respond with more stimulus when required, we stand ready to buy dips in the markets. We expect multi asset funds to play an increasingly important role in the years ahead. Many UK investors hold a large amount of their long\-term wealth in cash, either in bank and building society accounts, cash Isas or national savings. With interest rates persistently below the rate of inflation, holding cash has caused a real\-term erosion in capital, year after year. We expect this to continue, with the Brexit negotiations keeping UK interest rates low as inflation rises. In contrast, we believe multi asset funds should continue to offer a positive real return. Market confidence in the Brexit process may continue to have a large impact on fund returns. Signs of economic weakness or political uncertainty could cause further declines in the pound, boosting returns from global equities for sterling\-based investors. Ironically, a sense that the Brexit process is running smoothly and the UK economy is not going to slow down would see a strong pound, higher bond yields and poorer financial market returns. Be careful what you wish for. _The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. For funds that use derivatives, their use may be beneficial, however, they also involve specific risks. Derivatives may alter the economic exposure of a fund over time, causing it to deviate from the performance of the broader market. Sub\-investment grade bonds have characteristics which may result in a higher probability of default than investment grade bonds and therefore a higher risk. For more information concerning the risks of investing, please refer to the Prospectus and Key Investor Information Document \(KIID\)._

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