Diversifying Risk under One Umbrella

By Emily Lai

Seemingly offering a range of asset classes under one umbrella, are multi-assets the way forward in portfolio diversification? BENCHMARK talks to the multi-assets experts to find out whether it’s really that simple.

A multi-asset fund sounds all inclusive, giving the possibility of holding equities, bonds, currencies, even real estate all under one portfolio. It has been very popular in recent years with the unpredictability of the market, because the comprehensiveness seems to provide some growth and some shelter. But is it that simple? Is it a golden egg for everyone? Prominent figures share their insights with BENCHMARK.

Comparing Apples to Apples?

Critics charge that the “new” concept is Diversifying Risk under One Umbrella Cover STORY simply a marketing-driven extension of old “balanced funds”, which are unlikely to suit the highly specialized demands of modern investors, but there is actually a wide variety of choices with different objectives.

For example, both Standard Life Investments and Baring Asset Management aim for absolute return in their multi-asset strategies. Standard Life targets a stable level of return with as little risk as possible; while Barings is more concerned about lowering the volatility of the return. “It is easy to make gains, but the key is to keep them,” says Khiem Do, Head of Asian Multi-Asset at Baring Asset Management.

“We believe in using a broad range of investment strategies to create a well balanced portfolio,” says Mark Foster, Investment Director, Multi-Asset Investing at Standard Life Investments. “We only invest in ideas where we genuinely believe we will get a positive return for an acceptable level of risk.”

On the contrary, Fabrizio Quirighetti, Head of Multi-Asset & Fixed Income and CIO of SYZ Asset Management, takes a more conservative approach. “We focus first on capital preservation and liquidity rather than on the return objectives. As an Italian proverb says, ‘He who goes slow and steady, wins’.”

The strategies: diversification, flexibility, liquidity

As the name suggests, multi-asset funds draw on different assets around the globe to sustain performance. To Foster, diversification is key. Adding in assets that are uncorrelated or negatively correlated to growth assets can help generate returns while reducing risk in times of market stress. “With the total effect of diversification, we see that a substantial amount of risk in our portfolio is reduced, allowing it to generate consistent absolute returns with lower volatility,” he says.

Do, on the other hand, says flexibility is a top priority. As opposed to the majority practice, there are no minimum exposure requirements for any particular assets in his portfolio. Rather, he sets up the portfolio according to long term and short term analysis of the market. Each year, the 10 person multi-asset team comes up with a 10-year-forecast of different assets for strategic long term planning. And each month, the team holds a tactical monthly meeting to respond to the latest market happenings. The only limit imposed to the fund is the maximum holding of risky assets, which would boost clients’ confidence in lowering the return volatility.

Flexibility is also a major part for Quirighetti’s strategy, and he does it through maintaining the liquidity of assets. “Our investments may be sold on a daily basis, the transparency and liquidity are key for us to navigate through financial markets,” he says. The top-down approach also allows easy modifications in asset allocation. The multi-asset team, with a 3-6 months forecast on business cycles, inflation and government policies in mind, screens the market and looks for opportunities. Then the global equities team, which manages the equities buckets in the funds, would bring bottom-up insights on specific companies, sectors or geographical areas.

One size does not fit all

The central appeal of multi-asset funds is to investors with a medium risk tolerance, who are seeking maximum protection via diversification. Increasingly advisers think this is an appropriate solution for clients, particularly those with smaller portfolios, and it allows for a better matching of investment strategy with investors’ attitudes to risk, circumstances and goals. However, is it your cup of tea? There are a few of criteria to consider.

First of all, it is vital not to be seduced by the name. The comprehensiveness of the portfolios would depend very much on the client’s mandate and the regulation. On the most basic regime, funds holding only equities and bonds can be named as multi-asset funds. That can be seriously inadequate. This is even more a problem now due to the high positive correlation between bonds and equities.

Quirighetti has recently moved some of the investment to currency and gold for hedging and diversification. “I don’t think it is a good time, but it’s certainly a necessity,” he says. Do favors equity over bonds or cash now and has a large exposure to Chinese equity. He is keeping his eye on agricultural commodities as they may reach their bottom and he would be buying in through ETFs should opportunities arise. Alternatives can be adding in risks, but it can also be an effective tool for diversification.

Further, the more diversified the portfolio, the higher the potential cost of fund management. Although it should be cheaper and quicker to switch holdings within a multi-asset fund than to hold different dedicated funds, the cost factor should be taken into consideration when making investment decisions. It should also be noted that investments are now all put in one basket; the return would very much depend on the performance of one management team; which brings the risk of concentration instead.

Even after a fund is picked, investors should keep a close eye on the asset distribution as it might not be as predictable. Strategies of traditional funds tend to be fixed and investors know from day one if they are buying into a fixed and low cost portfolio, or an opportune but more costly one. Strategies of multi-asset funds could change overtime, making them potentially random, highly concentrated and high cost products.

All in all, as in all investments, only time and performance can tell how good the portfolio is, not the name. BM