A truly active approach to equities based on fundamental research and a disciplined investment process
Investing across a diverse range of asset classes can be a simple way for investors to improve their potential for returns, while at the same time, lowering portfolio risk. This is particularly important given that equity and bond valuations are elevated and the investment outlook is more challenging.
In recent years, economic conditions have proved highly favourable for investors, with most traditional asset classes delivering strong positive returns. Equities in particular have performed well, while bonds have also made significant gains. As a result, investing in traditional balanced portfolios (typically comprising 60% equities, 40% bonds) has proved rewarding.
Central banks have played a big part in driving up bond and equity markets, providing cheap and plentiful cash to stimulate economic activity. But the party is unlikely to last. Now that the global economy, particularly the US, is now on firmer footing, central banks see less need to provide support and interest rates are heading upwards. This will present a headwind for traditional portfolios reliant only on equities and bonds for returns.
Multi-asset investing is particularly well-suited to the current challenging investment environment as it provides exposure to a globally diverse mix of asset classes.
Multi-asset investing is particularly well-suited to the current challenging investment environment as it provides exposure to a globally diverse mix of asset classes. The good news is that a far broader range of investments is available to investors than ever before. This includes asset classes such as emerging market bonds, currencies, interest rates, inflation, volatility, infrastructure, property, high-yield bonds, loans, asset-backed securities, insurance-linked securities, litigation finance and marketplace lending.
Diversifying across a broad range of asset classes and geographies can not only expand the opportunity to make returns but, importantly, can cushion against losses by spreading risk more broadly. Multi-asset investing is therefore a way of building more resilient portfolios while retaining the potential for investment returns.
While multi-asset investing may sound like an easy win, constructing a multi-asset portfolio can be fiendishly complicated for the amateur investor. To quote Warren Buffett, “Investing is simple, but it is not easy.” It is important therefore, to invest with managers who have the breadth and depth of research capability to make sound investment decisions.
One reason for the short-termist approach of many investment managers is the obsession with benchmark and peer group comparisons. This is understandable, given that a manager’s performance is often judged relative to a benchmark or peer group, usually over periods of three years or less. However, it can encourage myopic decision-making and undermine the key investment goal of providing good long-term returns while managing the risk of capital losses.
Unfettered by benchmark considerations, a multi-asset portfolio can access a far wider, more diverse universe of opportunities. Moreover, such an approach leaves managers free to invest only in their highest-conviction ideas where they see the best opportunity for long-term returns, rather than fretting over whether the fund is ‘overweight’ or ‘underweight’ a particular stock or market.
Investment markets are driven by human responses to events and to the behaviour of other investors. Just like people, markets can shift very quickly from relative calm to chaos, and often behave irrationally. The behavioural biases that dictate investors’ decision-making can often give rise to attractive investment opportunities.
To illustrate, worries about China prompted Black Monday on 24 August 2015, when investors panicked and global financial markets plunged. However, the concerns proved to be overdone and markets subsequently rebounded. For example, the UK FTSE index shed £72 billion on Monday but on Thursday regained £60 billion. In fact, the FTSE rose 1% over that week. Clearly, there was a lot of money made and lost but, to make the right decisions, investors needed to keep a clear head and their emotions in check.
Managers with a flexible investment approach and the fortitude to take a contrarian investment position can readily take advantage of such opportunities. In this regard, a multi-asset approach can help: an effectively diversified multi-asset portfolio is likely to be more resilient to any sharp market fall, leaving the manager psychologically more prepared to think objectively and exercise sound judgement.
Returns from global equities and bonds are likely to be harder to come by in future and investors will need to cast the net wider to achieve their performance goals. A diversified multi-asset approach is particularly well-suited for the current environment, expanding the opportunity for returns while providing greater resilience in periods of market stress.
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