Multi Asset June 2017  

How has multi-asset evolved over the past decade?

This article is part of
Guide to multi-asset investments

How has multi-asset evolved over the past decade?

Multi-asset funds have evolved over the past 10 years to meet the changing needs and demographics of investors.

Early forms of multi-asset portfolios typically had an allocation to bonds and equities, not straying far from these traditional asset classes – a far more simplistic version of the funds investors are more familiar with today.

“A decade ago, many multi-asset funds would have looked very similar to a traditional long-only strategic ‘balanced’ fund, with relatively static strategic asset allocations across conventional asset classes,” Altaf Kassam, EMEA head of strategy and research, investment solutions group at State Street Global Advisors, points out.  

He observes over the past decade these multi-asset funds have evolved to include some or all of the following features:

  • More dynamic asset allocation, possibly based on the prevailing risk regime and using tactical asset allocation as an overlay
  • A far broader range of asset classes including those previously considered alternative, such as smart beta, high yield and emerging market debt, and commodities
  • The use of derivatives and other volatility control techniques (e.g. target volatility triggers, or TVT) for risk management, and
  • The use of leverage.

What spurred the development of multi-asset products and why did they become seemingly more complex?

It might seem too easy to hark back to the financial crisis of 2008 for an answer. 

Financial crisis

But for those seeking to understand how and why multi-asset funds have become so popular and why they have taken the form they are today, the crisis offers an explanation.

Thomas Wells, fund manager, multi-assets CFA at Aviva Investors says the global financial crisis was an example of the so-called butterfly effect, which is “the idea that a relatively small event can reverberate across the world”.

The crisis was proof of the “interconnectedness of markets”, according to Mr Wells.

“Even if you focus your investments on the UK you cannot expect to be insulated from global events. The dollar, for example, is regarded as a safe haven in times of trouble. So an event in one of those far-flung corners of the world, such as North Korea, that spooks investors can cause the dollar to rise in value,” he comments. 

“How would that affect the UK? Well, the FTSE 100 tends to be inversely correlated to the pound as around 75 per cent of its constituents are dollar earners. So scary rhetoric from Pyongyang could well cause UK shares to fall in value even though that country lies on the other side of the world and its economic ties with the UK are negligible.”

Figure 1: Total returns in sterling by major global markets 2007-16

FTSE 1007.36-28.3327.3312.62-2.189.9718.660.74-1.3219.07
US-DS market5.28-13.0713.9620.21.6710.8330.6719.666.1333.45
Europe ex UK DS market15.7-28.323.389.24-16.0416.5722.59-2.426.6323.15
Asia Pacific ex Japan DS market38.19-32.6953.9924.28-15.1418.590.2312.61-2.5327.22
Latin America DS market54.02-27.1170.4325.78-16.179.39-11.02-7.39-17.0140.13
Japan DS market-6.311.96-6.3619.27-10.42.1725.092.5618.6822.59
Emerging markets DS market41.11-36.8960.3127.41-18.7613.14-4.927.37-9.0534.41

Source: Aviva Investors

The uncertainty that has dogged financial markets ever since and the changing behaviour of asset classes such as fixed income, meant investors sought diversification and a way of measuring risk levels in the funds in which they were invested.

Francis Chua, assistant fund manager, asset allocation at Legal and General Investment Management, notes: “The global financial crisis of 2008 may seem like a distant memory but many will look back at that episode as a catalyst for the strong growth we have seen in multi-asset solutions.