How multi-asset funds can hedge against geopolitics

This article is part of
Guide to Multi-Asset investing

How multi-asset funds can hedge against geopolitics

With geopolitical tensions on the rise across the globe, be it Brexit, a breakdown in US-Sino relations, or something else, investors are likely to rush to protect their portfolios.

Amid this landscape, several investors have turned to multi-asset funds as a one-stop shop to reduce their exposure to volatility. 

But what is it about multi-asset funds that can help investors mitigate geopolitical uncertainty?

Diversify against political uncertainty

Several in the industry note that multi-asset funds are often the most popular way to diversify returns. 

Alan Chan, chartered financial planner and director at  IFS Wealth and Pensions: “A multi-asset fund often provides global diversification from a range of assets, hence political uncertainty associated with one country may only form a small part of the overall portfolio.”

He cites that while recent volatility caused by Brexit may have caused investor woes, but this could often only constitute 20 per cent of an overall portfolio with remaining allocation spread to equities globally, including US, Europe, Asia and emerging markets. 

Gareth Deacon, portfolio manager at Blackfinch Wealth, says: “Enabling a provider to utilise its risk budget across asset classes allows for much more dynamic portfolio management, with the ability to both produce positive returns and protect capital on the downside.”

He explains this level of freedom for investment managers, while retaining a level of independent oversight, allows active managers to avoid areas that may pose risks to investors, whether geographic, asset class or sector specific. 

“This freedom is invaluable in times of political and economic uncertainty,” adds Mr Deacon. 

Danny Knight, investment director at Quilter stresses multi-asset funds are able to react in real time to market conditions or political changes as they often possess futures or trackers. 

Mr Knight says:  “For instance, in the current market volatility produced by Brexit a multi-asset fund is able to make quick changes and utilise currency hedging to hedge currency exposure and holding level.”

He highlights that this is not possible through other structures such as: adviser run model portfolios, outsourced model portfolios, discretionary managers and unitised fund structures. 

Multiple asset classes 

Multi-asset funds can curtail geopolitical risk because the risk is usually spread across many investments, according to experts. 

Mr Deacon confirms:  “By spreading an investment across a range of asset classes, investors can minimise their exposure to systematic (market) risk.”

He adds: “By understanding the correlations between asset classes as markets move through economic cycles, multi-asset managers can manage volatility and reposition a portfolio as conditions dictate."

Mr Chan says: “A multi-asset fund provides diversification for the investor as the underlying portfolio contains a spread of investments including equities, property, bonds and cash. In other words, the fund is designed as a single solution for investors.”

David Bebb, chartered financial planner at Pannells Financial Planning notes because fund managers are institutional investors, they can get access to investments that an ordinary retail investor cannot.