How do you define multi-asset because it can mean different things to different people?
Alan Pickering: As a consumer of products manufactured by people around this table, I don’t want to be put off by a label that is dated or confusing. It is a challenge for the people in the engine room to transmit messages through the marketing departments that consumers like me find enticing, rather than: “This is old stuff dressed up under a new label.” In all investment discussions the label is important, but it’s much more important to read the table of contents that are underneath the label.
Théodore Economou: Asset owners are going into multi-asset because they recognise that eight years of zero and negative interest rate policies have challenged traditional portfolios. Portfolios are challenged in terms of capital protection, income and diversification because the fixed income pocket is facing a new paradigm and cannot deliver the same objectives as in the past. The growth part is challenged as well in that valuations are high and so is risk. As that realisation dawns, we see asset owners looking for an answer and multi-asset has some attraction.
Alex Koriath: What is the attraction to multi-asset? If you run a multi-asset portfolio, it’s not that suddenly you have more assets. The asset class universe stays the same, so you must be doing something different to make this attractive.
Suzanne Hutchins: There are many different asset types you can have within a multi-asset vehicle to make it different, and the investment process and philosophy can be wide-ranging. Some strategies get involved in illiquid assets; others have more of an equity-bias or use alternatives or perhaps derivatives. So there’s a broad spectrum of what can be classified within the multi-asset sector. The purpose of a multi-asset fund comes down to defining what the investor wants to use it for; what is the outcome expected, what sort of risk do they want to take, and what sort of return is achievable for that level of risk?
Pickering: Being a trustee of a number of pension schemes, I want to extract value from the economy. I want to extract that value in different forms to meet the requirements of different groups of members who are at various points in the journey plan. I guess the challenge for someone like me is do my requirements for extracting value inhibit the creation of value, because that would be something of an own-goal. There are only so many slices in which you can cut up the cake. The bigger the cake, the bigger the slices.
Kate Mijakowska: One point to raise is governance. Asset owners simply don’t have time to make decisions about whether their equity allocation should be 50% or 55% on a weekly basis. That’s where the requirement for diversified growth funds came from and now it’s slowly evolving into something else and thus products with maybe lower equity beta are created. They offer alternative sources of return and that’s how they are using portfolios, but it all depends on the objectives and the objectives themselves are evolving all the time.
Mirko Cardinale: For institutional investors, multi-asset is the starting point because we apply the principle of diversification; the only free lunch in finance. The question is: do asset owners actually build a multi asset portfolio themselves or do they outsource it? That’s where multi-asset products come into play.
Pickering: Diversification is not a free lunch. I am prepared to pay for diversification, but I don’t want random diversification. I want to avoid stuff that I don’t want to hold or isn’t appropriate for me. So while there are benefits of diversification, we should not cheapen the concept by saying it’s a free lunch – it isn’t.
Andrew Cole: Our multi-asset programme was born out of the dotcom bust when swathes of pension funds were let down by a fixed-weighted benchmark. Managers did some minor asset allocation, but come the big move they were never brave enough. To that extent what they found was that when it came to the benchmark they ended up with the tail wagging the dog. It had no real relationship between what they had in their benchmark and what they thought their liabilities or risk profile genuinely was. Our programme was born out of a notion of: “Well, you gave us a benchmark, we were asked to work against that. If your benchmark really is defined in other ways, i.e. I need a real return of two, plus an income of three, give us that as the objective and we’ll think about the most appropriate assets to meet that at any given time.” A huge swathe of clients didn’t have the corporate governance structure to make the big asset allocation switches that matter. It would take them far too long to take meaningful money out of equity to put into bonds or into something else. For us that still remains the overriding factor today that actually clients first and foremost require real returns. You can’t retire on just having a great information ratio.
Economou: Alex, you asked how multi-asset can deliver something better. To answer that we have to accept that from an asset owner perspective, the overall asset allocation will always be made by asset owners themselves. What has changed under the “new paradigm in fixed income” is that you now need to have long-term allocations in most of the portfolio in order to capture excess returns. Be it in equities, using value calls, geographic sector calls and so forth, and waiting for those to be rewarded, or in fixed income which you increasingly have to hold until maturity. The price to pay for that, is that you then need a part of the portfolio that can simultaneously protect capital, deliver performance, and provide a source of liquidity when needed. From our perspective that’s where multi-asset comes in. What a multi-asset manager can do is provide that additional liquid building block. It can be done with a very simple and liquid portfolio of indices and bonds, and using techniques to improve the risk-to-return and to control risk.
