Reducing risk in volatile times

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Appetite for diversification

But do they actually mitigate risk?

Many multi-asset funds now work to specific targets, which allow investors to invest in a fund that is meant to be more in line with their own risk profile.

Importantly, these multi-asset funds should maintain this risk level over time, whereas historically a cautious fund might have varied its exposure to equities significantly over time, resulting in the risk of the portfolio varying.

By holding multi-asset funds over a typical investment time horizon, the balance between risk and return should improve. It does this by combining different asset classes in a portfolio, such as equities, fixed interest, commercial property and cash, in one fund to provide a diversified portfolio that is supposed to smooth out some of the volatility that comes with investing. 

Mr Hughes says: “As these different asset classes perform well at different times of the economic cycle, it provides a strong natural method of reducing risk. 

“In addition, hopefully high-quality fund managers may be able to further reduce risk and/or enhance return by adjusting their exposures to these asset classes at the appropriate times, to capitalise on opportunities that present themselves in the market.”

When an adviser is trying to build up a multi-asset portfolio, one of the key things they should be looking at is the suitability assessment, to make sure the client is invested in the right place from a risk-profiling point of view.

Ms Ibrahimpasic says that diversification is also very important, and that it is not just a case of having different asset classes, but also looking at their correlation.

Correlating assets

Having a portfolio of different assets that are also highly correlated can expose an investor to losses if those assets were to fall. Ms Ibrahimpasic team recently looked at the correlation between high-yield bond funds and equities.

She adds: “[The correlation] is probably at an all-time high in the past 20 years. What you need to be wary of is the correlation between asset classes.

“They are not constant. If you only hold two asset classes you may not be as diversified.”

As volatility across many markets increases, Mr Onuekwusi says that diversification is going to become even more important.

In an environment where investment returns in all asset classes have been going up since 2009, this means advisers have become overly focused on which multi-asset fund is top of the charts in terms of performance rather than focusing on diversification.

Mr Onuekwusi, adds: “However, I do think we are moving into a period where volatility is elevated and that diversification is going to be more important.”