How has multi-asset evolved over the past decade?

Supported by
Aviva Investors
twitter-iconfacebook-iconlinkedin-iconmail-iconprint-icon
Supported by
Aviva Investors
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”.

Even if you focus your investments on the UK you cannot expect to be insulated from global events.Thomas Wells

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

Market2007200820092010201120122013201420152016
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. 

“Investors began to seek multi-asset strategies that offered the prospect of stable returns and low risk. New types of multi-asset funds were born in response, from traditional strategic funds to absolute return-type solutions.”

Choosing the alternatives

David Absolon, investment director at Heartwood Investment Management, explains: “The evolution we’re seeing as a business and I think others are, is the use of alternatives in a multi-asset offering.

“One of the challenges we all face is trying to build diversified portfolios and one of the asset classes that’s been great at doing that over the last few years has been bonds. Obviously we’ve been in a bond bull market. 

“It’s been very helpful to multi-asset class investors, particularly at times when equity markets are extremely volatile.”

But he questions whether, given the way the bond market is currently priced, it will continue to be an effective diversifier.

“We need to look at other sources of diversification in our multi-asset class portfolios if bonds are not what they once were,” he suggests.

Alternatives is definitely creeping up as a building block of portfolio construction and, normally, at the expense of fixed income so there’s definitely an evolution.David Absolon

Managers have increasingly turned to alternative asset classes to increase the diversification of returns generated by allocating to less correlated assets.

Mr Absolon says the alternatives exposure in Heartwood’s multi-asset offering has increased and he expects this to continue.

Paul Ilott, director multi-asset research at Scopic Research, part of The Adviser Centre, acknowledges: “We now have more sophisticated strategies being used, more underlying asset types, a vast array of instruments being deployed and a wider range of investment objectives than we did 10 years ago.

“For example, you now find strategies and asset classes that were previously the preserve of the hedge fund world, or simply not available until relatively recently, finding their way into retail multi-asset funds. 

“Institutional-type pension strategies, such as diversified growth funds, have also been repackaged for the retail space.”

Mr Absolon adds: “Alternatives is definitely creeping up as a building block of portfolio construction and, normally, at the expense of fixed income so there’s definitely an evolution.”

Having adapted to suit the investment world investors find themselves in now, multi-asset funds have become a more mainstream investment product.

One of the ways in which they have entered the mainstream is by targeting specific outcomes, again a consequence of the financial crisis and its aftermath.

Rob Hall, head of client portfolio management at Russell Investments, suggests: “Multi-asset investing has moved away from the ‘set and forget’ approach where a strategic asset allocation was set and rarely revisited, and where managers made small incremental decisions around this central point. 

“Such an approach was found wanting in the global financial crisis when investors were unimpressed by relative outperformance when markets were falling significantly.”

He notes today’s investor is interested in outcomes, with growth, income, capital preservation, or volatility targets being paramount.

David Coombs, fund manager for Rathbone Multi Asset Portfolios, reasons: “Multi-asset has moved from being a niche product in the retail market to mainstream as many advisers moved to an outsourced investment model, preferring to focus on financial planning.”

Outcomes and outsourcing

This change in the relationship advisers have with their clients means they can focus on helping them achieve the outcomes they want and outsource the investment decisions to fund managers and asset allocators.

“The evolution of risk profilers and modelling tools in the retail market has influenced distribution as advisers seek a consistent, auditable and client-specific investment selection process,” acknowledges Adrian Gaspar, multi-asset investment specialist at Prudential Portfolio Management Group.

He explains strategic asset allocation (SAA) remains a “key component” of multi-asset portfolios.

Most portfolio managers also make shorter-term tactical asset allocation decisions to generate extra returns but some will have far greater latitude which can of course be beneficial or detrimental to performance.Adrian Gaspar

“Understanding the SAA of portfolios can provide an insight into a variety of asset class exposures across different funds. This could influence absolute and relative performance.

“Most portfolio managers also make shorter-term tactical asset allocation (TAA) decisions to generate extra returns but some will have far greater latitude which can of course be beneficial or detrimental to performance.”

Mr Gaspar continues: “Truly risk managed/risk targeted fund ranges will display all of the above characteristics while also emphasising the monitoring and maintaining of fund ‘shapes’ on a daily basis with the aim of not allowing asset class exposures to drift too far from the agreed SAA benchmark. This is particularly relevant if a fund has been matched to a client risk profile.”

It is not just the composition of these types of portfolios that has evolved over the years but also the sheer number of them.

Armed with so much choice, deciding whether to invest between multi-asset, multi-manager and risk targeted funds is not a question of right or wrong, but what is most appropriate for the client in question.

eleanor.duncan@ft.com