Multi-Asset Focus  

Getting the diversification balance right

Getting the diversification balance right

The word ‘diversification’ is often talked about in relation to multi-asset funds.

This is because these types of solutions deliver their return objectives by being invested in a range of assets and using the scope of strategies available, delivering their objective as a core standalone fund in clients’ portfolios.

But what does good diversification look like within a multi-asset strategy? How can an adviser know what they are looking at when they lift the lid of a multi-asset fund to look under the bonnet? And is it the case that the more asset classes a fund is invested across, the better?

Tristan Hanson, fund manager of the M&G Global Target Return fund, believes there is simply no such thing as the “right balance”.

“The term ‘multi asset’ includes such a multitude of approaches to investing – passive, active, tactical, strategic, high beta, low beta, relative, absolute and so on – that, other than the obvious fact the manager can invest in more than one asset class, the term tells you little about the characteristics of a given fund,” he says. 

This is why it is so essential, he confirms, that someone considering an investment in a multi-asset fund understands the characteristics of the fund in question.

Beyond bonds and equities

One thing is certain: multi-asset products have moved on from simply comprising a mix of bonds and equities – or at least they should have done.

Andrew Harman, senior portfolio manager for multi-asset solutions at First State Investments, explains: “To our mind, multi-asset doesn’t mean having a little bit more in bonds, or a little bit less in equities."

If there is no value in government bonds, for example, they shouldn’t form part of a multi-asset portfolio. 

“At the same time, if there is a compelling opportunity, an investor should be free to back it with conviction, rather than doing so halfheartedly because of a necessity to hold a certain percentage in another (less attractive) asset class", he says.

Gary Potter, co-head of the multi-manager team at BMO Global Asset Management, believes: “When it comes to managing a multi-asset portfolio, the essence of a well-diversified and well-balanced solution is to ensure there is sufficient diversification to dampen down the risk of over concentration in asset classes such as equities, fixed income, property, commodities or infrastructure for example, but not to over diversify. 

“If you do all the necessary work, you want to ensure that when your hard work is rewarded with good investment performance its position and sizing in the portfolio is meaningful enough to make a difference.”

He cautions: “On the other hand, you need to make sure that you don’t flood the portfolio with too many components as this will simply dilute the results.”