Multi-asset investment embraces a growing range of investment styles and assets and growth in the sector is encouraging the use of increasingly diverse allocation strategies. Here, managers from BNY Mellon Investment Management assess the development of the market and consider its future prospects.
These are turbulent times for global investors. Against a backdrop of market uncertainty, global regulatory change and unconventional monetary policies, investors face an increasingly difficult challenge in finding reliable and sustainable sources of value. Slow, uneven global growth, rising debt and uncertainty about the direction of central bank policies in many markets are helping raise interest from both institutional and individual investors alike in multi-asset strategies.
Traditional portfolio diversification principles are also being challenged by rising correlations between some asset classes, compelling asset managers to explore a broader spectrum of nvestment possibilities. Consequently, uncertain market conditions and a low-yield, low-return environment have focused new interest on multi-asset investing. Keith Collier, investment strategist with BNY Mellon’s Investment Strategy and Solutions Group points out, no single asset class can be relied on in pursuit of investment objectives. “You can try to protect against risk with more defensive classes of equities, but at the end of the day, equities are still equities. Investors need to offset sources of equity risk with sources of duration,” he says.
In their pursuit of lower correlation and consistent returns, multi-asset strategies embrace a broad range of investment techniques, applying both passive and active management approaches to an ever-widening pool of investment assets, geographies and capital structures.
The growth of interest in multi-asset investment strategies in the U.S. has been fueled in part by the proliferation of this asset class in the form of target date, target income and target risk strategies that play an increasing role in retirement plans. All of these multi-asset strategies are considered Qualified Default Investment Alternatives (QDIAs) by the Department of Labor under the Employee Retirement Income Security Act (ERISA). By including QDIAs in the retirement plans they offer, plan sponsors can reduce their fiduciary exposure while also addressing plan participants’ needs for suitable asset allocations that reflect their retirement objectives.
Multi-asset investment today represents an evolution of traditional core asset allocation strategies which typically relied on a 60/40 balance between equities and bonds that could be adjusted depending on prevailing market conditions.
Over the last decade, a number of factors, including the global financial crisis, increasing access to new investment areas, the growing sophistication of investors and liquidity fueled by unconventional central bank policies such as quantitative easing, have all increased the attractiveness of multi-asset solutions. Today, the emphasis is much more on tactical asset allocation, with a growing awareness that different assets can deliver specific benefits in certain market conditions, in specific geographies at specific times.
Commenting on the evolution of this investment strategy, Newton Investment Management multi-asset manager, Paul Flood, says: “Multi-asset has evolved to the extent there is now a much wider array of assets with much more differentiated characteristics than was available 10 years ago. Many investors are beginning to realize the advantages of the wider diversification and exposure they can bring. The holy grail of multi-asset investing is finding alternative assets that can deliver in times of stress when more mainstream assets are not performing well.”
Managers at San Francisco-based Mellon Capital also note the evolving nature of the multi-asset investment market and say its own investment strategies encompass a steadily growing asset range.
Mellon Capital head of asset allocation portfolio management Vassilis Dagioglu comments that, “Back in the 1990s, it was typical to see global balanced portfolios based on a straight split between bonds and equities. Today, we look at multi-asset as a much more flexible ‘go anywhere’ type strategy, with no set strategic asset mix. Increasingly, investors want diversification and the multi-asset approach is a natural way to address that.”
A recent survey conducted by BNY Mellon and FT Remark gives evidence of how great the interest in investment beyond traditional asset classes has become. Ninety-three percent of senior executives from 400 large institutional investment firms said their investments in alternatives had met or exceeded expectations over the last 12 months. More than half (53%) of investors said they would increase their allocation in private equity over the next 12 months, with over a third (36%) of respondents planning to raise their exposure to real estate; 40% said they would invest more in infrastructure. Emerging markets made up 31% of the institutions’ alternative investment exposure, with investors planning to allocate 34% of future alternative investment to emerging markets.1
At Newton, Flood believes there is value to be found in unconventional assets such as renewables, infrastructure and aviation finance. He adds that instruments such as these enjoy low levels of correlation with more traditional assets such as equities and bonds and can bring useful diversification to portfolios.
“By adopting a multi-asset approach you can identify assets with some very attractive characteristics and good long-term return potential. That said, it is important to recognize there may be short periods of time when those returns deviate from those of traditional asset classes—both for better and for worse,” he says.
QE OR NOT QE?
At a macroeconomic level, Flood is concerned the quantitative easing (QE) policies employed by central banks are distorting sectors, such as government bond markets, with potentially damaging long-term consequences for investors. He adds that a multi-asset approach can help investors to insulate themselves against potential and ongoing QE-related problems.
“Never before have we seen people pay to lend money. But under QE that is exactly what is happening in a large section of global government bond markets. My view is that investors need to be as far away from the effects of QE as possible and the most affected sectors are government bond markets and cash. The further away investors can be from these, the more likely they will be better protected from any fallout if QE ultimately breaks down,” he says.
No investment is 100% risk-free, so investors in multi-asset strategies should consider their risk tolerance carefully, while also targeting realistic returns, adds Dagioglu.
“In the first instance, investors need to identify the reasons why they would like to have a multi-asset in their portfolio, whether it is to be able to have a return or capital appreciation or to provide diversification to other asset classes,” he says.
“They need to identify the level of risk they want to target within their portfolio and consider the correlation with other asset classes and what level of liquidity they want to maintain in their portfolio. Then they need to judge the performance of different managers and strategies and see how well they have delivered on the level of risk, risk management and returns they have set out to achieve.”
According to Dagioglu, a significant challenge facing the sector is the limited track record of many multi-asset funds in what is still a relatively immature market. This can make it hard for investors to gauge both likely performance and risk on some portfolios.
“A number of managers have launched multi-asset strategies in the last 3-5 years, so they will consequently only have limited track records. It is not always easy to go back and test the performance of the assets they hold or draw meaningful conclusions about how they would perform in different market conditions,” he adds.
Mellon Capital global investment strategist, Jason Lejonvarn, believes the growing size of some multi-asset funds should be viewed with some caution by investors.
“Downside risk management is very important within the multi-sector asset space and investors should be aware of potential risk. The growth in assets in the sector and sheer size of some multi-asset funds now probably points to some degree of underlying liquidity risk which investors should consider carefully,” he says.
After a volatile first half of 2016, investors across a wide range of assets are bracing themselves for more uncertainty in the months ahead.2 Nevertheless, some multi-asset managers believe market turbulence can work in their favor, particularly in sectors such as emerging market investments.
Flood says, “We expect more volatility and therefore more opportunity in areas such as emerging markets and subordinated debt in the months ahead.
We don’t think it is a good idea to chase yield but there are opportunities out there to generate attractive returns if you are willing to adopt an opportunistic approach and take tactical positions.”
Commenting on broader market prospects for growth in the multi-asset investment sector, Dagioglu remains optimistic, predicting it will likely continue to expand and attract new investment throughout the rest of 2016.
“It will be interesting to see what new ‘flavors’ of investing will develop in the multi-asset space. One area of recent growth we have seen—particularly in the recent low yield market—has been investors looking to multi-asset as a potential source of income. The multi-asset approach allows them to combine a dynamic suite of asset classes to preserve capital and manage risk while they seek to generate income,” he says.
Asset Classes May Offer Different Degrees of Protection in Different Economic Regimes
Source: BNY Mellon. The chart depicts which economic environments (high growth and Inflation, low growth and inflation, etc.) are the most supportive for each of the major asset classes. For example, BNY Mellon would anticipate that TIPS would most likely outperform when inflation is the highest and underperform when inflation is falling. Asset classes are also ranked from those considered the most liquid on top to the least liquid at the bottom.