Friday, 1 July 2016

Why multi-asset investing works.

Multi asset investing can be easily arranged through your existing portfolio of investments but becoming ever more popular are multi-asset funds that are able to invest across the full range of asset classes and may include equities, bonds, property and cash. A multi-asset approach provides a greater degree of diversification than investing in a single asset class. The benefits of diversification within multi-asset strategies are the investments being spread over a broad range of strategies, styles, sectors and regions which can help cushion the occasional shocks that come with investing in a single asset class. This enhances the potential for investing in the best-performing asset class and reduces the impact of the worst-performing asset class.

Many investors look to multi-asset funds to provide a lower-risk investment than a pure equity fund, but with greater prospects for growth than a pure bond fund. Amid market volatility in global markets, multi-asset funds, which were once considered institutional or pension fund-oriented products, are gaining traction among many individuals as part of their investment portfolio.
The reasons are many for the newfound popularity. The speed at which fund managers can implement changes in asset allocation is faster compared to traditional funds, along with the ability of the fund to choose from a wide variety of asset classes anywhere in the world. The third reason is the ease with which individuals can invest.

In the current market environment of subdued global growth and limited return expectations across a number of asset classes, the main benefit of multi-asset investing relates to the greater choice and flexibility embedded in the investment process compared to single-asset class funds. Fund returns will depend a lot more on alpha generation (returns above the market average) as investment opportunities will present themselves in a much more scarce fashion than in the past.

Because growth is scarce at present and income is hard to generate without additional risk. That means an income-seeking investor is facing the worst of both the worlds. If you are a single-asset class fund manager, then you can either manage income or volatility. This is where multi-asset really aims to provide an outcome that investors are looking for.

Most investors understand the advantages of multi-asset investing; having some investments that should in theory go up in value when others go down makes pretty obvious sense. The trouble in very volatile markets — as we saw during the 2008 global financial crisis — is that different kinds of investments can suddenly all go down together, even if they would ordinarily be expected to perform differently. The return expectations based on the current economic conditions have come down a lot. Every additional risk is no longer producing the additional return that it used to. It’s a big dilemma that we are facing.

A lot of asset classes are in neutral now as the growth is scarce and we think there has been a big shift in the way investors should look at markets. With the US Fed finally embarked on an interest rate hike, you need to be a lot more careful in identifying where the opportunities are. With the growth outlook so subdued, it’s no longer one strategy that would generate strong returns which is where a multi asset strategy comes to the fore.

True diversification is hard to find but exposure to relatively scarce asset types, which perform in a way that is truly different from the major traditional asset classes, like company shares and bonds can help a multi-asset strategy weather future volatility. Investors who are looking for more stability could therefore consider a multi-asset strategy appropriate for their individual risk approach. 

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