New breed of multi-asset portfolios aim to address shortfalls

There is nothing new about multi-asset investing, with major fund houses such as BlackRock, Credit Suisse and Goldman Sachs making this their key pitch to potential clients during the last five years.

But critics of this school of asset management – previously known as ‘balanced portfolio’ management in the 1990s and before, when it just meant determining percentage allocations of a narrow selection of bonds and equities – say its practitioners have never been very specific about their return objective or levels of risk exposure for their clients.

Today, a new breed of multi-asset portfolios is increasingly tackling these shortcomings with goal-oriented and risk-targeted objectives. Dynamically managed, their promoters claim they are particularly suitable to today’s volatile markets.

In the past six to 12 months, despite the sovereign debt crisis in Europe, global equities have returned almost 10 per cent since the beginning of the year. Though encouraging, there is scepticism among investors about the sustainability of valuations.

Investors in multi-asset portfolios, however, claim they do not have to worry about short-term market fluctuations. Rather than being pre-occupied by market gains or losses of just one asset class, they construct an appropriate blend of equities, corporate bonds, and broader fixed income, according to longer-term investment goals, rather than short-term market volatility.

Key to this is a move away from traditional benchmarks, which are not risk-rated. “The biggest failing of traditional frameworks stems from the assumption that correlations are stable through time,” says Robert Jukes, a global strategist at wealth manager Collins Stewart.

“As the credit crunch demonstrated, when risk assets deliver unusually large negative returns, they tend to become significantly more positively correlated with other risk assets, with which they may not normally have a strong relationship.”

That’s why Collins Stewart has come up with the Risk Enhanced Multi Asset Portfolio, which increases active risk to avoid loss. It does this by committing to a fixed absolute risk target, through which it de-risks relative to the benchmark in times of market stress. By fixing absolute risk, Collins Stewart also focuses on lower risk returns. The optimised investment process reduces the ‘fat-tails’ of benchmark portfolio returns.

Andrew Cole, manager of the Baring Asset Fund, says that across Barings’ multi-asset portfolios there is a focus on owning the right assets at the right time. “We do not believe in the traditional benchmark split of 60:40 equities to bonds and assuming that through traditional portfolio theory they will eventually come good,” he says.

“Rather, we are committed to making timely and appropriate asset allocation decisions to minimise the volatility of the portfolio and protect against downside shocks, allowing us to pick the low hanging fruit when it is available.”

Thereby, the fund seeks returns equivalent to the long run return on equities, but doing so with significantly less risk.

Managed funds were previously sold on “a promise of almost nothing,” says Skandia’s chief investment officer, James Millard. “Earlier people said ‘we’ll invest your money and we’ll look after it for you’. That was the message without much idea of what the outcome of that would be or the path that the portfolio would take,” he says.

But this is changing, believes Mr Millard. “This is where multi-asset funds have evolved, like our Spectrum fund range. But also in the return-targeted, real return space. I think managers are becoming a lot better in articulating what a product does for a client and what it addresses.”

Robert Jukes, Collins Stewart