In part two of our multi-asset series, Louise Farrand examines two different approaches to multi-asset investing
In a cautious and cost-conscious new reality, investors have shied away from hedge funds and are seeking alternative ways to diversify. With bonds offering low interest rates and equity markets experiencing volatility, trustees have found themselves in an urgent search for a reliable and steady source of yield.
Multi-asset funds claim to have the answer. They market themselves as delivering equity-like returns, but with half the risk associated with equities.
The right level of diversification
“The sector has grown a huge amount and to be honest that is proving a bit of a challenge for everybody. A lot of multi-asset funds are being lumped into that one sector and a lot are doing quite different things,” says Georgina Taylor, product director for Invesco Perpetual’s multi-asset team. “When I get out and talk to trustees and when we go and are put forward for mandates, one of the challenges is helping people understand what we do versus what some of the other offerings do.”
The sector has grown a huge amount and to be honest that is proving a bit of a challenge for everybody”
Pictet’s Andrew Cole suggests there are two dominant ways managers construct a multi-asset fund. The first is the highly diversified and complex model which is exemplified by Standard Life Investments’ highly successful signature multi-asset fund, Global Absolute Return Strategies Fund (GARS). This type of fund tries to benefit from so-called a “relative value” strategy, which involves the strategic buying and selling of assets with the aim of profiting no matter what direction markets take.
The second is to build what Cole defines as a more traditional, conviction-based portfolio. “People often think that the way to diversify is to have lots of things. But the more you have, the less you have got in what could be the best thing,” he observes.
“We have a more concentrated portfolio but it’s in the things that we like and we don’t sit there thinking, ‘We’ll have a bit of that just in case because it helps diversify the portfolio.’ There’s no point having something in the portfolio that might help diversify but just loses you money if it doesn’t outperform. You want good, effective portfolio diversification,” he argues.
We have a more concentrated portfolio but it’s in the things that we like”
This straightforward approach has been the key to Pictet’s success in this area, Cole believes. “One of the reasons we’ve been successful with trustees both in the DB and the DC space is that we tell a very simple story. We don’t utilise leverage, we don’t want a very complex portfolio. We want a portfolio built on very simple, transparent building blocks where the risk/return characteristics of every asset in the portfolio are easily understood by us and our clients.”
Although they are very different, Cole believes that his approach and Standard Life Investment’s can peacefully co-exist. “Typically, in my past experience with Barings, we shared a lot of clients with Standard Life. People would see that we got results in different ways and that gave them diversification.”
Consultants and researchers have taken the time to define this sector a little bit better”
The good news is that as this disparate sector develops, the quality of information on offer is improving. “Over the last ten years or so, people didn’t have the education in place to understand how to use [multi-asset funds]. The difference in the last five or six years is that consultants and researchers have taken the time to define this sector a little bit better, have spent the time trying to help investors work out how to use these funds,” says Taylor.
How should trustees set about selecting a fund in this broad universe? A good starting point is for trustee boards to work out what risk and return profile they want from a multi-asset fund, before they start the selection process. Is it a replacement for an esoteric mandate, somewhere on the alternatives spectrum? Or are you seeking to replace some or all of your equity investments?
Try not to get overwhelmed by the complexity of what’s on offer. Instead, dig deep. “Every fund is different. We recommend clients look at each underlying fund and see what is under the bonnet and what is driving the return profile… Just hearing the headline return profile and return objective shouldn’t be the reason why you would pick a fund.” says Nick Ridgway, head of manager research at Buck Consultants.