This reflects the impact of regulation, such as MiFID II, as well as the intuitive attraction of the ability to invest across asset classes to deliver investment outcomes.
For instance, figures produced by the IA show the amount managed on a multi-asset basis almost tripled between the end of 2009 and the end of 2018, from £77.3bn to £208.8bn.
One of the key reasons for this growth has been the built-in diversification offered by multi-asset strategies.
By their nature, they allow fund managers to invest across company shares and a variety of fixed income instruments worldwide, and often offer the freedom to consider other asset classes, such as real estate, commodities or infrastructure.
One of the key reasons for the growth of multi-asset has been the built-in diversification offered by multi-asset strategiesThis diversification is seen as offering peace of mind to advisers and investors, as savings are not ‘all in the one basket’ in a period of market stress.
As well as the increased security offered by a diversified portfolio, being able to access potential investment growth across a range of asset classes is an attractive feature for many.
Often, advised clients need to invest for growth – to afford a large expense in the future, build up savings during a working lifetime, or ensure the long-term sustainability of a retirement pot – but are only too aware of the potential impact of a large loss in value of an investment, especially if this occurs over a short period.
In particular, investors can be much less tolerant of losses when the value of savings are high and have been built up over many years.
Pound-cost ravaging
Equally, one of the results of the pensions freedoms has been a much higher level of awareness of ‘pound cost ravaging’.
This occurs if the need to withdraw a regular income from an investment pot to meet living expenses in later life is affected by large losses in the value of that pot, making it difficult or impossible to make up the returns.
Diversification offers a key ‘first line of defence’ to investors looking to manage the risk of an investment portfolio.
Taking on different types of risk – such as equity risk, credit risk or inflation risk – is likely to be rewarded to different extents at different times, and so offers a smoother ride to the long-term investor who remains concerned about the consequences of shorter-term market gyrations on the value of their investments.
Having exposure to a range of asset classes would have been a blessing in many of the periods of market stress seen in the past two decades, when equities and bonds in particular have tended to move in different directions.
However, in periods of markedly negative investor sentiment and elevated market volatility, even diversification can have its limits.
During market volatility seen in 2008 and last year, for example, only high quality government bonds tended to generate positive returns as investors focused on the most liquid, lowest risk asset classes.
Investing in commodities or other alternative assets would not have protected a multi-asset portfolio from losses in these periods.
Predictability
Such concerns have had particular resonance in recent months, over a summer of concentrated unpredictability in areas such as geopolitics and trade negotiations.
Fears are increasing that the long-running global economic expansion seen since the global financial crisis may be coming to a close.
Certainly, economic growth has decelerated amidst higher levels of uncertainty associated with global trade and technology conflicts.
What options are open to investors worried by this volatility?
Moving entirely into cash or high quality government bonds seems less attractive when even 30 year gilts are yielding less than 1 per cent a year, and bank account interest rates are well below inflation.
Purchasing explicit protection for holdings via option markets can play a role, but such insurance is generally costly given elevated investor demand in periods of volatility.
It also brings increased complexity and timing risk to investor portfolios.
At UBS Asset Management, we see clear demand for a product offering a clearer signpost to investors in terms of likely drawdown, while still aiming to deliver an attractive level of growth over the long term.
The UBS Multi Asset Diversified Growth Fund (UK) takes a diversified balance of asset class holdings as its first line of defence. It then marries this to a clear, systematic process to manage the risk of sharp losses within the fund.
In markets where assets held by the fund have increased or are stable in value, the fund will maintain high investment exposure.
Where the portfolio has suffered declines, exposure to risky assets is reduced and the proceeds are invested in cash and safe assets.
This is with the aim of limiting losses to approximately 10 per cent within a 12-month period – however, as with the nature of investments this cannot be guaranteed.
Holdings of risky assets are then increased again over time as tolerance for further losses permits (for example, during recovery periods). MADG (UK) is targeting what we see as attractive investment growth over the long term of five to ten years, with a comparator of cash plus 4 per cent per annum.
While we remain of the view that the global economy can weather the current storm, we expect market volatility will continue to be higher than post-crisis averages as geopolitical risks remain elevated and the interaction of downside growth risks, potential tariff-driven inflation, and a range of possible monetary policy outcomes drive continued market uncertainty.
For investors targeting long-term growth, albeit keen to ensure peace of mind amidst a difficult market backdrop, we believe that that the explicit, systematic focus on drawdown management offered by MADG (UK) will resonate.
Michael Walsh is a senior investment specialist at UBS Asset Management
