“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.
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.