Multi-asset: an all-weather investment solution

By 5 minute read

Whether we know it or not, we’re all multi-asset investors. Most professional investors are comfortable investing across a range of asset-classes, such as equities, bonds, cash, property and alternatives. Individual investors typically hold a combination of bank deposits, property (which may be the house or apartment that they live in), direct equities and investment funds.

In this article we set-out some of the benefits of multi-asset investing, before focusing on a more relevant question, which is how to be a multi-asset investor. We then focus on income-themed strategies, which have become increasingly popular in recent years.

The benefits of multi-asset strategies

Multi-asset strategies can invest in a wide range of asset classes, ranging from lower-risk government bonds to higher-risk equities, and almost everything in between. Typically, they have a broad mandate and high degree of liquidity, which enables them to respond quickly to opportunities by adjusting their asset allocation.

Multi-asset strategy can also provide the benefit of diversification. A well-managed multi-asset strategy will hold different asset classes which have low correlations with each other. A classic example would be a combination of equities and government bonds, which generally have a low correlation between them. The result is a portfolio with a superior risk-adjusted return.

In the current environment government bonds look unlikely to generate appealing returns in the medium to long run, so we invest in other asset classes which offer similar diversification benefits but greater return potential. These include infrastructure, asset leasing and renewable energy, assets which require specialist knowledge and are not easily accessible to many investors.

Our own multi-asset strategies are fully benchmark-agnostic. A focus on a benchmark can lead to wrong investment decisions. In many fixed income markets, for example, the larger benchmark weights are those countries or companies which are most indebted. Avoiding these pitfalls will likely result in a better return. Being benchmark-agnostic also allows a greater focus on the best investment ideas, without being concerned about short-term fluctuations compared to the performance of the broader market. Another key benefit of a multi-asset strategy is that it can respond much more quickly to unexpected events.

All-in-all, multi-asset strategies offer the potential for strong returns by focusing on the most important investment decision: asset allocation. Secondly, value can be added in each asset class by only incorporating the best investment ideas. A third advantage is that multi-asset strategies can quickly respond to unexpected events. Finally, the diversification across assets results in a better risk/return ratio.

Not whether, but how?

Once these benefits are understood, the key decision is not whether to be a multi-asset investor but how? To determine this, investors and advisers need to consider several questions:

  • Do you have the time and expertise to make good asset allocation decisions? If the answer is no, then dedicated multi-asset portfolios offer a potential solution.
  • Are there constraints upon you implementing a fully flexible asset allocation? If you can't easily access some alternative asset classes then dedicated multi-asset strategies may offer you an opportunity to incorporate these within your portfolio.
  • Do you have the knowledge and expertise to design outcome-focused multi-asset portfolios? There is a longstanding market for growth-themed multi-asset portfolios (often known as diversified growth funds), but over the past five years we have seen the emergence of income-themed strategies. These are particularly attractive for investors such as mature pension schemes requiring cash-flows to pay benefits, and individual investors seeking to supplement retirement income. We discuss these in more detail below.

Income-themed multi-asset strategies

We have been managing growth-themed multi-asset portfolios for several decades. Five years ago we launched a new multi-asset strategy that focuses on generating a high and growing income, with the option for investors to receive regular monthly income payments.

In determining the asset allocation of this income strategy, we primarily focus on the return prospects of each asset class, while having a preference for higher-yielding asset classes. We combine our return expectations, correlations, yields and volatilities to construct the asset allocation. This process seeks to ensure that we have a diversified portfolio offering a decent return, an attractive income yield and a relatively low volatility.

The strategy typically holds a high proportion of its assets in higher-yielding asset classes, such as high-dividend equities, listed real estate, infrastructure assets, high yield and renewable energy investments.

Within equities, we focus on companies with an attractive dividend yield, which is well covered by earnings and has the potential to grow. We, for instance, own a number of Asian and US chip manufacturers. These companies benefit from the large and growing demand for processors and memory chips, while at the same time offering an attractive dividend yield.

Listed real estate is another component of the strategy. Real estate companies typically have a high payout ratio. They have a lower correlation with equity markets compared to other equity sectors due to their sensitivity to interest rates. Within real estate, the focus is on sectors with growth prospects due to structural tailwinds. Currently the strategy is invested in several logistical real estate companies, which benefit from the demand for warehouses due to the growth of online shopping.

Another key asset class is infrastructure. Infrastructure companies often own concessions to operate assets like toll roads or airports. These concessions can run for many decades and so have a fairly strong visibility on future cash flows. Furthermore, the long-duration nature of these assets makes them sensitive to interest rate movements and therefore an interesting substitute for some fixed income assets.

Multi-asset: an all-weather investment solution

Multi-asset strategies generate performance by focusing on one of the most important investment decisions; asset allocation. Diversification across and within asset classes reduces volatility. This also allows for more concentrated portfolios consisting only of the best investment ideas in each asset class.

The result is portfolios which can be tailored to meet specific objectives, such as growth or income, and have the ability to add value over time.

There shouldn't be any phase of the economic cycle in which multi-asset strategies are most attractive. In different phases of the economic cycle, different types of asset classes tend to perform well. So whatever the weather, a multi-asset strategy has the flexibility to meet its objectives.

Jacob Vijverberg

About Jacob Vijverberg

Portfolio Manager Diversified Income Strategies