Multi-asset investing has advantages in volatile markets, but its simple premise requires expertise to implement, writes William Beverley, head of macroeconomic research at Iveagh.
Wealth preservation and capital protection have never been more critical in today’s “risk on/risk off” markets, which continue to surprise with high volatility and synchronised losses across multiple asset classes.
At the same time, real returns have rarely been harder to achieve when so-called “risk assets” – like equities that traditionally have participated in economic growth and wealth generation – have returned next to nothing in the last decade.
Most recently, fixed income securities are in many cases producing negative real yields with rates at 300 year lows.
Why multi-asset investing is easier said than done
Relevance of multi-asset
In this environment, the well-publicised advantages of multi-asset investing are particularly relevant, especially:
- Global diversification across a broad range of asset classes, strategies and regions reduces dependence on the return of individual assets and sectors, and market timing.
- Freedom to allocate capital flexibly and responsively permits the overall risk level of the portfolio to be dialled up and down depending on macro or market conditions, or investor preferences.
- Targeted investments exploit a wide set of opportunities, or hedge against specific risks.
Together, these characteristics increase the likelihood of stable returns over time compared with concentrated single asset class or sector portfolios, as well as reducing the likelihood of capital loss and increase the scope for capturing positive returns.
If only it were this simple! In practice, success in multi-asset investing requires considerable expertise and independent thinking, paying careful attention to:
- Multi-asset class research.
- Asset allocation and portfolio construction.
- Portfolio management.
- Dynamic risk management.
- Portfolio implementation.
The asset allocation difference
At the heart of multi-asset investing is, of course, asset allocation – which academic research finds explains much of the volatility of portfolio returns.
For example, we use an asset allocation and associated investment process that has evolved over many years of use by the Guinness family and clients of its family office, and continues a tradition of wealth management stretching back more than a century.
Understanding asset classes
Most portfolio managers start with some kind of analysis of the risk and return characteristics of each asset class. Some focus on traditional asset classes – equities, bonds and cash – while others develop a wider universe of assets. We include 19 different asset classes, including high yield bonds, infrastructure, property and volatility, each carefully selected for competitive risk-adjusted returns, diversification potential, yield, liquidity and efficient access.
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First mentioned in Cridland Report