By Michael Kelly
A structural shift in asset allocation occurred after the financial crisis, which combined with the search for yield in a rising rate environment, created demand for multi-asset class investment solutions that dynamically adjust to the global market conditions. There are now numerous multi-asset strategies that can help investors solve their own distinct investment challenges and with each week that goes by, the list of people asserting how to divide multi-asset into new categories grows.
The focus for most of these new strategies is on meeting specific outcomes. Whether they are contemplating how to meet the liabilities for a pension fund or endowment, or how to generate income for retirement, the common thread is the continual need to achieve outcomes.
That the asset class is in a state of flux illustrates that the asset class has moved on. The UK is a leader in multi-asset strategies, typically referring to them as diversified growth funds (DGFs), and historically if a fund was not considered to be a “true DGF” there was limited market appeal. Over time, it had become clear that the first generation DGFs, bringing 20% strategic exposures of alternatives into what used to be global balanced funds, often served to help the smaller UK based pension plans to diversify and was a well-penetrated market. The majority of UK pension plans counted two or three DGFs in their portfolio, often accounting for around 10% of their portfolios, yet second generation products were now becoming available that played complementary roles. Today, interest in this asset class has become truly global, with DGFs being referred to more generally on the global level as multi-asset funds.
As the global market for outcome-based strategies develops, multi-asset funds have evolved into a range of sub-strategies, or categories, each with its own objectives. In a repeat of how the hedge fund industry evolved over the last two decades, a consequence of this market being in flux is that there is no consensus in the industry on multi-asset or DGF strategy definitions. Various categories have been suggested by consultants and other market participants; this is the first step in determining how the new flavors of multi-Asset might fit in their portfolio, and this will only spur on growth in the asset class.
Since the financial crisis, we have seen global markets become dominated and distorted by extraordinary monetary policy implemented by central banks. This has led to a situation where interest rates are at all-time lows and valuations of equities have risen and are not providing such attractive opportunities to investors. Given this macro backdrop, the various types of multi-asset strategies are designed to achieve specific, and often very different, investment objectives.
In general, at the lower risk end of the spectrum, strategies that seek to be alternatives to fixed income typically focus heavily on downside risk management in order to match the level of risk in fixed income, while promising more attractive return potential due to lower exposure to interest rates. At the other end of the spectrum, multi-asset funds that seek to be alternatives to equities typically focus on achieving equity-like returns with lower volatility than equities, through a dynamic asset allocation approach focused on growth assets. Each strategy provides investors with vital tools to be better positioned for the market environment ahead.
In summary, the challenging market environment has led investors to look increasingly to the different strategies within multi-asset as additional tools to complement their liquid exposures in growth assets and capital conservation assets. What began as a single strategy to provide broad diversification benefits while retaining liquidity, multi-asset will continue to evolve into a range of strategies that achieve multiple objectives whilst being fit for the market environment ahead. The current 10% ceiling in exposure to DGFs or multi-asset funds that institutional investors now have could feasibly reach 15-20+%.
Michael Kelly is global head of multi-asset at PineBridge Investments
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