One for all or all for (n)one?

Daniel Peters, partner and investment consultant, Aon

Getting to the root of multi-asset strategies

Multi-asset portfolios combine assets with different characteristics which behave differently and are often subject to different laws and regulations. In the past we have seen balanced funds offer a simple mix of bonds and equities, which through diversification sought the right balance of risk and return. Since then, they have developed in sophistication and range. Some would argue this now blurs the lines with absolute return funds – those that look to add value in all market conditions.What trends are we seeing in our clients’ portfolios? A common theme is greater focus around the use of multi-asset funds in portfolios. For example, where a diverse approach to credit strategies is the goal, the use of multi-asset credit (MAC) strategies has been a possible answer. If the remit is much broader, it may be diversified growth funds (DGF). The common thread is to widen the opportunity set and in so doing allow access to asset classes that might otherwise be beyond the practical reach of the investor.Ultimately, the objectives and governance framework of each pension scheme will determine whether multi-asset strategies should be introduced. DGFs are considered by many to be a ‘one stop shop’ for diversification of all manner of assets, typically to provide equity-like returns with reduced volatility. In an environment of increased volatility, coupled with lower expected asset returns and yields, these strategies will be increasingly tested to perform against this objective. In recent times, when volatility has been low and returns from risk assets have been high, these funds have generally lagged equity markets. For many, they have also fallen short of investors’ expectations.In contrast to the broad nature of DGFs, MAC funds access a range of credit strategies, which can often be part of a risk reduction journey for a pension scheme. This has often been coupled with minimising interest rate and inflation risk through the use of liability driven investment (LDI). Can they offer more value than simple cash based funds though? Indeed the diversification benefit offered by some multi-asset products is not as great as the diversification benefit offered by recently introduced alternative risk premia (ARP) funds, which profit from long and short strategies, rather than just long, through different strategies. With a greater reliance on manager skill and higher fees, it is important these funds provide the value they target.With a wide range of investment opportunities, it is often difficult to predict income for multi-asset funds. Some even have limited income generating ability alone. As a result, this is rarely a rationale for placing them as part of a portfolio. What they do offer is the ability to balance a portfolio by allocating to a broader range of asset classes. They can achieve growth with lower volatility to help funding and offer liquidity. This is why they are often favoured for operating alongside other funds such as liability driven investments or more illiquid strategies.In any event, a common reason for all multi-asset funds is governance. A single manager brings access and oversight to a wider range of asset classes under one roof. With multi-asset funds, investment managers aim to select the most attractive and complementary investments. Whether this provides too much scope is often the challenge. Is it a jack of all trades, master of none scenario? Indeed, even approaches within the multi-asset credit universe can vary significantly. For example, a manager may be skilled at high yield and private debt, but lack expertise within emerging market debt. Does the scheme gain more by having the diverse range of assets even if the fund manager is not first class in all areas? This is an important issue to consider before investing.In addition, the multi-asset manager will often be tasked with making the asset allocation decision between the different types of assets to which the fund is allocated. Calling the market is a skill that has been notoriously elusive for investors and this is another area of delegation that must be watched carefully. Fund selection is therefore important. Which approach is best depends on a pension scheme’s specific circumstances and future direction. Indeed, in many cases the question to be asked is whether the scheme could achieve the same or better results for lower costs without outsourcing all of these elements.Are multi-asset funds a simple solution to a complex problem? Potentially. But the question of whether they are the right solution is the most critical of all.