How resilient are multi-asset strategies to potential market shocks and macro events like Brexit and how dynamic do they need to be to mitigate these risks?
David Vickers: It really depends on how you are positioned. I would imagine there will be a lot of different results coming out of the turbulence we’ve just had with Brexit. Correlations increase when you get a liquidity event or an event that leads to withdrawal of capital, so diversification doesn’t do quite as much for you. It depends on what you did going into that, and how you thought about Brexit, or the broader risks that are generally present. To protect yourself being as dynamic as possible is a good starting place.
Peter Hill-King: What will people do next – whether they are acting in line with their investment philosophy – is an important consideration. They may have an urge to do something quite different, but if they stick to their process, the long-term outcome can be quite different from allowing themselves to be caught in the short-term volatility we’re going to see.
Stephen Budge: There’s a wide range of multi-asset strategies out there, but a key reason for using an active fund is that they can prepare for events in advance. They can make sure the portfolio is positionedto manage against those risks and adapt to the outcome.
Tristan Hanson: There are all sorts of different funds with different characteristics under the multi-asset umbrella so it is difficult to talk in general terms. These events also raise a different question, which is how important is short-term volatility? Should it be something you’re willing to look through, and see as an opportunity, or is it something that you’re saying to your investors that you will limit?
Percival Stanion: Most of the multi-asset funds will be used by investors with a reasonable investment horizon. Therefore, you cannot be a trader on the day of events like Brexit. So you should, at least to some extent, be prepared for events like this, which don’t come out of the blue. Investors would be expecting managers in our UK multi-asset universe to some extent have insulated portfolios from this type of shock. And then expect managers to take advantage of opportunities as they arise.
Okay, so managers will have been prepared for this even if they didn’t call the final result?
Vickers: It’s not just that you knew the event was coming, but a market reaction to the event. A couple of weeks ago, your reaction function might have been very different. So, it isn’t just the event, but the level of pricing around it, and the probability of it materialising and the potential upside relative to the downside. Typically, it’s about trying to create asymmetry and mitigating that drawdown, then creating asymmetry on the way back out again – that is the route to success.
Hanson: I feel people’s horizons have been massively compressed. It doesn’t really matter what your portfolio has done on any given day – it’s ludicrous to invest on that basis – it is the outcome over a sensible investment horizon that matters. Some people will embrace short-term volatility, while others will want to limit it.
Budge: Yes, you wouldn’t expect portfolios to suddenly change on the back of events, but the outcome could change your view as a manager. It’s this active governance around the fund, the preparation for events, and the ongoing revision of portfolio allocation which is the obvious value in a multi-asset approach.
Vickers: The multi-asset situation we’re in now is vastly improved on the old balanced days. People are still trying to second guess where there is consensus but managers are having to think much more for themselves in terms of what they want to do with their clients, given the expectations of their own behaviour. Typically, you’re not now constrained by a relative return benchmark, which means you consider 65 relative to 70 and consider it’s been a successful day at the office, despite the negative return you may have generated.
Budge: It’s an interesting point you make about the balanced consensus funds because they’ve done quite well being beta-heavy. However, we’re probably going to see a divergence between the older, traditional multiasset funds and the newer generation funds.
Hanson: If you’re long both bonds and equities the last however many years, you’ve done fantastically well. Fixed income seems to be getting more negative in terms of yield, and so the relationship of funds versus the fixed income market, is going to be a big differentiator in a couple of years.