Reducing risk in volatile times

This article is part of
Appetite for diversification

Reducing risk in volatile times

A multi-asset investment strategy is another way of mitigating risk, in that a fund manager has built in a diversified fund with a range of assets, having done the research already.

So how helpful are these funds really?

A multi-asset strategy can be a very useful way for investors to gain an instant portfolio with one purchase without having to worry about all of the investment decisions that come with building a portfolio, such as how much to have in equities or bonds and whether to own US equities or emerging markets.

In recent years, many more multi-asset investment solutions have become available, which allows investors to select investments that are based on their risk profile, to take some of the strain away from investors. 

Multi-asset portfolios tend to be very diversified across a range of asset classes, such as equities and fixed income, and increasingly alternatives.

Justin Onuekwusi, a multi-asset fund manager at Legal & General Investment Management, says: “If you have just two asset classes – UK equities and UK gilts – your portfolio is going to be a lot more volatile than if you spread your equities over different regions, or if you spread your bond portfolio over different regions.”

Key points

  • It is a good idea to have alternatives in a multi-asset fund
  • Active and passive solutions are available
  • It is best to have non-correlated assets in a multi-asset portfolio

In the alternative space, it is not just about property and commodities. Infrastructure and renewable energy, among others, are proving increasingly popular.

Tihana Ibrahimpasic, multi-asset research analyst at Janus Henderson, says: “These days what you have is a whole host of different instruments, so you can use both mutual funds, active and passive exchange traded funds, smart beta, stocks and bonds and derivatives.

“Diversification across multiple dimensions is what brings that risk reduction. Another thing that is quite important is that multi-asset funds can provide a cushion in those volatile times.

“You are no longer exposed to one asset class, but you can invest across a whole range. At a certain point in time any one of those asset classes will perform positively. That’s the expectation.”

Protection during downturns

The main comfort for investors when it comes to multi-asset investing is the downside protection, particularly during times of large losses, which are difficult to recover from.

Ms Ibrahimpasic adds: “If you think about your standard equity portfolio, if you lose a quarter of your portfolio, it actually takes you 33 per cent of the remaining investment to grow, just to be back at that initial level. This is where the power of compounding works for investing.

“The whole concept of multi-asset investing through diversification is to provide a cushion for your portfolio, so you suffer smaller losses that are a lot easier to recover from.”

In addition, both active and passive multi-asset solutions are now available, giving investors far more choice than before. 

Ryan Hughes, head of active portfolios at AJ Bell, says: “While a small premium is paid for employing someone else to make the investment decisions, for many first-time investors or those that don’t want to play an active part in managing their portfolio, multi-asset funds can play a helpful role.”