Over the years, investors have flocked to balanced funds to secure multiple sources of returns and avoid excessive leverage to certain asset classes.... However in periods of uncertainty, ‘balance’ alone may not be enough, and could result in missed opportunities -- or worse, continue to expose to certain risks.
The return of rising interest rates and the prospects of a global trade war mean markets are at an inflection point, with volatility on the rise and traditional sources of returns likely to come under pressure. Because outperformers can change frequently, especially in volatile markets, investors need to move beyond static balancing strategies to an actively managed multi-asset approach. Such a strategy incorporates a wider range of asset classes from various geographies and is flexible enough to adjust portfolio compositions in tune with market realities, to enhance returns, mitigate risk and capitalise on opportunities wherever they arise.
A multi-asset portfolio strategy aims to deliver excess returns over time by giving careful consideration to investors’ return targets, their tolerance for risk and volatility, as well as external factors such as the regulatory environment. Having the freedom to invest beyond the standard equity and bond universe ensures these strategies are highly versatile, and can be structured to fit any investor profile.
High-potential emerging market stocks and bonds, as well as commodities and alternative asset classes such as infrastructure and private credit, may all form key components of a multi-asset portfolio. This paves the way for new levels of diversification, as does diversifying within asset classes -- for instance, by investing in growth and value stocks, or taking on bonds of varying durations – to preclude clustering in certain assets, markets or sectors. The active multi-asset strategy readily recognises pro- and anti-cyclical elements, enabling it to quickly react to market overreactions in either direction by buying into upward trends and selling into downward ones at precisely the right times.
Additional layers of diversification and the ability to respond rapidly are vital when virtually every asset class is under siege - such as during the global financial crisis in 2008, or the 2011 European debt crisis. This is often when the worst behavioural traits of investors manifest themselves to jeopardise portfolio performance. Framing bias, for one, has investors either focusing on markets they think they know best (typically their home markets) or so-called glamour stocks that appeal thanks to their past performance and business models. Yet another trait that can be a portfolio’s undoing is inertia, which can result in missed opportunities and turn potential gains into compound losses.
An active multi-asset strategy is highly effective at neutralising these issues because it can switch between asset classes in a rational and methodical fashion based on pre-determined criteria, without being swayed by the irrational considerations that colour investor decisions in times of market stress, or euphoria.
Exploiting market opportunities to enhance returns is as important as mitigating risks, especially when low yields are likely to remain a reality for some time.
Proprietary investment strategies can enhance returns while reducing risks relative to their static benchmarks by combining asset allocation with active risk management. Using an approach that typical static mixed products are not amenable to, portfolios are designed to maximise returns over a market cycle until a client’s risk tolerance is exceeded, at which point cash and short-term bond allocations are increased, substantially reducing risk.
A dynamic risk management approach helps hedge against market risks and limit losses while ensuring a portfolio’s upside potential is not unduly constrained. Yet this can only be led by a team consisting of analysts, economists and portfolio managers possessing decades of multi-asset investing experience and in-depth knowledge of the vast range of asset classes and markets that may feature in the portfolio. This expertise supports fundamental analyses of economic cycles and asset valuations, which in turn help identify and seize upon key market movements with tactical allocations across and within asset classes.
Rather than constantly seeking balance, an active multi-asset approach aims to achieve the optimal portfolio structure at any given time, bearing in mind the investor’s goals and the external environment yet not beholden to market trends. And it is active beyond occasionally adjusting allocations, incorporating unique research methodologies and dynamic risk adjustment techniques to coax out further performance – even when uncertainty looms.
