Breaking down multi-asset investing

Breaking down multi-asset investing
  • Investment Insight
  • 5 minute read

In its simplest form, multi-asset investing is about holding a mix of different types of investment. Company shares and government bonds are among the most common types of investment held, however in recent years the range of investments readily included under the ‘multi-asset’ umbrella has expanded widely.

The evolution of multi-asset investing

The concept of multi-asset investing has undergone a substantial shift over the past 20 years. For many years, multi-asset funds or portfolios were generally split between shares and bonds in allocations aligned with risk appetite. A moderate risk, or ‘Balanced’, portfolio for example, would have something close to a 50/50 split between equities and bonds. For a UK private client, the equities would have likely been predominately UK listed companies, and the bonds UK government bonds (gilts) and corporate bonds issued by UK ‘blue chips’. The equities provided upside potential, while the bonds were meant to preserve capital and generate a steady and sustainable income.

Whilst the evolution of multi-asset investing was already well underway, the bear markets which followed the Dotcom bubble and the Global Financial Crisis undoubtedly served to accelerate the process, exposing as they did the shortcomings and outdated nature of a basic bond/equity split. At times of acute market stress the correlation between asset classes increases, and both equities and bonds can suffer. Simply put, the traditional multi-asset allocation was no longer proving adequate.

As contemporary financial markets made it possible for UK investors to efficiently access global markets – as well as ‘alternative’ asset classes, such as commercial property, private equity, hedge funds and infrastructure – investment managers had to obtain a better understanding of the increasingly broad range of asset classes and strategies available to them. It logically followed that those managing multi-asset retail funds or private client portfolios should incorporate such investments for optimal diversification.

Modern Portfolio Theory

Hypothetically speaking, the perfect investment would generate high returns with little or no risk. The reality is that such an investment is all but impossible to find, there is always a trade-off between risk and reward which investors need to weigh up. Of all the strategies created and put to work in search of the best risk/reward investment, none have been as popular and as consistent as Modern Portfolio Theory.

Developed by economist Harry Markowitz in the 1950s, Modern Portfolio Theory hypothesises that it is possible to build an ideal portfolio – an optimal blend of assets – which will deliver the best possible return for a given, quantifiable, level of risk. The theory promotes diversification of asset classes and securities in particular; not putting all your eggs in one basket, but also appreciating how different investments might affect the overall portfolio’s risk and return.

Modern Portfolio Theory states that potential investments are subject to both systematic risks – such as recessions, interest rates, geo-political unrest and natural disasters – as well as unsystematic risks, such as issues particular to a certain stock – a change of company management for example. The theory suggests that while adequate diversification cannot avoid systematic risk completely, it can significantly reduce, and potentially eliminate, unsystematic risk. As a result, the risk/reward trade-off should improve, and investors should enjoy better outcomes than those which would otherwise have been achieved given the prevailing market backdrop.

Understanding risk and reward

Despite the fact that Modern Portfolio Theory has been a mainstay of multi-asset investing since the 1950s, the concept – and how it drives the processes investment managers put in place – can still be poorly understood outside of the wealth / investment management industry, and sometimes poorly explained or represented to clients.

Inconsistent use of terms across the industry (and even within individual firms) can confuse matters and make comparing the performance of different multi-asset solutions extremely challenging. There are no universally used multi-asset benchmarks – a “Balanced” or “Moderate Risk” portfolio provided by one firm can be very different to a portfolio given the same label by another firm. Investment managers offering multi-asset solutions do not all choose their investments from the same, easily defined, opportunity set and ready-made benchmark derived directly from a market index (in the same way UK equity fund managers might with the FTSE All Share, for example). The industry standard sectors or benchmarks used are very broad, meaning that investor outcomes can also be very broad.

The theory might underpin what all multi-asset investment managers do, but putting it into practice can be done in numerous and continuously evolving ways. Furthermore, issues such as defining what constitutes “Moderate” or other levels of risk can be subjective, while methods for formally assessing client attitudes to risk can vary too. Whatever the mechanics of the solution, it is important that advisors understand exactly how an investment manager is running their clients’ investments, that the strategies employed accurately reflect their risk tolerance and return requirements, and that the process is well resourced and robust.

Why choose multi-asset funds?

  1. Fully bespoke, segregated multi-asset solutions might not always be necessary. Unitised multi-asset funds can offer an all-in-one investment solution for your clients.
  2. Benefit from a specialist fund manager who will actively manage the portfolio continuously in the background.
  3. Your clients benefit from research resources, investment processes and risk management oversight of specialist asset management houses.
  4. They are not subject to VAT, whereas segregated discretionary fund management services are.
  5. They can make managing capital gains tax more straightforward.
  6. You can explore the possibility of combining multi-asset funds to provide a blend of active and passive investment styles, as well as directly invested and fund-of-fund approaches.

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Important information

This article is only intended for use by UK investment professionals and should not be distributed to or relied upon by retail clients. The value of investments will go up and down and clients may get back less money than they invested. The information contained in this article is believed to be correct but cannot be guaranteed. Opinions constitute our judgment as at the date shown and are subject to change without notice. This article is not intended as an offer or solicitation to buy or sell securities, nor does it constitute a personal recommendation.

Please be aware, the value of investments can fall as well as rise and that past performance is not a reliable indicator of future returns and you could get back less than invested. Click here to understand the risks associated with investing. Calls to any number may be recorded for training and monitoring purposes. This site uses Cookies.