Changing demographics, regulatory requirements and other external forces may shape how multi-asset investing evolves. Scottish Widows explores what the future might hold for this investment approach.
If only we had a crystal ball that could tell us the future, investing would be so much easier. We live in complicated times, however, and - particularly in the past year - it has often seemed as if uncertainty is the only certainty for asset managers, advisers, and their clients.
With any number of political and economic situations hanging in the balance, we believe that long-term, multi-asset investing continues to offer one significant advantage: the protection offered by portfolio diversification. As ongoing uncertainty and a slowing global economy loom at the forefront of investor sentiment, an increase in market volatility in the year to come is a significant possibility. That's why a multi-asset approach to investing for the long term remains an essential strategy to navigating the road ahead.
But how might the mechanics or nuances of multi-asset investing change going forward? And what are the external forces that will shape its future direction? There are multiple forces at play that could have an impact on how multi-managers approach their strategies, including changing demographics, regulatory requirements, and investors' drive for socially responsible investing.
Shifting Investment Objectives
One theme for multi-asset investing going forward will be even greater diversification in determining the ideal asset mix. The traditional "balanced" portfolio of equities, bonds, and cash positions will remain a staple for many investors, but as market conditions change, the use of alternatives such as infrastructure debt, private equity, or other bespoke strategies will become increasingly important ways to unlock value for investors. A more flexible mix of emerging and global equities, corporate and government bonds, property and infrastructure, and active and passive strategies can provide a better balance of market risks. Of course, the more sophisticated the asset mix, the higher the costs involved, which will be an important consideration for multi-asset managers.
Moreover, an emphasis on income growth is likely to become more important as people work later into their lives - not fully in drawdown and perhaps even still saving into their pensions. The traditional means to growing income - fixed-income assets - have not been delivering the yield they historically have, so multi-asset strategies need to find a way to bridge that gap with alternatives or higher-yielding equities.
Another issue that will impact multi-asset investing will be heightened scrutiny around costs and fees. Not only are these becoming more important to advisers and clients, but regulatory agencies have put charges under the spotlight with the Markets in Financial Instruments Directive II (MiFID II) and the requirement to disclose transaction costs alongside ongoing charges.
This sort of transparency looks to remain a key theme for regulatory authorities. Cost disclosures are only a part of the "value for money" conversation taking place throughout the UK and Europe, as regulators seek to stem the economic impact of poor-value investment vehicles. According to Deloitte's Centre for Regulatory Strategy, "the growth of the sector has sharpened regulators' focus both on the value for money the sector delivers to consumers and on whether consumers invest in suitable products". Consequently, firms will need to be able to prove that their products offer value, fair pricing, and clear disclosures for consumers. Furthermore, the Financial Conduct Authority (FCA) has set its sights on funds holding illiquid assets such as property, and the proper use of benchmarks in targeting and measuring performance. It's increasingly clear that effective stewardship and governance, with independent oversight, will be more important than ever.
This issue of stewardship dovetails with the ongoing trend in the marketplace towards Environmental, Social and Governance (ESG) investing, which aims to balance returns with measuring the impact of sustainability and ethical concerns. While the definitions and metrics can be fairly flexible, the growing demand for ESG options is undeniable. Investor demographics are one reason: as more millennials enter the workforce and begin the process of saving for retirement, their generational values are framing the debate. Additionally, the impact of shareholder activism and increasingly, the attention of credit ratings agencies are forcing fund managers to rethink how they select assets. There is mounting evidence that a responsible or ESG portfolio can produce returns on a par with similar portfolios without an ESG screen, so there's no reason to think this trend won't pick up momentum and become mainstream.
Whatever the market conditions in the next few years, multi-asset managers will need some essential resources: a thorough governance process with independent oversight; a long-term investment horizon and patience amid volatile conditions; an open attitude to ESG issues; and creativity and flexibility in seeking out opportunity for customers to build wealth.
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