Building a well-diversified portfolio by investing in different asset classes is essential in today’s ever changing markets. But the fragmented nature of global capital markets can make it challenging to always pick assets which will be proven to be effective diversifiers. So what can investors do with their money? One solution could be to seek out additional diversification by investing in funds that have a truly flexible approach to asset allocations, more commonly referred to as multi-asset.
A multi-asset fund combines an array of asset classes such as cash, equity, bonds and alternative assets as an investment thus creating a portfolio of assets within a single investment vehicle. The role of the fund manager is to create a suitable blend between the various asset classes according to the needs of the respective fund investors. This goes beyond merely allocating asset classes. The fund manager needs to consider the fundamental drivers of risk and return of a given asset class; that is, risk premia. Asset classes can be equated to baskets of returns that an investor receives for taking on exposure to the systematic risks associated with an investment. The investment process begins by looking at the characteristics of these risk premia, including performance expectations and how these behave over time. In particular, returns from these risk premia vary significantly over short-to-medium time horizons, as prices move away from their fair market value. This presents an opportunity to add value with active management.
Multi-asset class investments increase the diversification of an overall portfolio by distributing investments throughout several asset classes whilst reducing overall risk when compared to holding just one class of assets. The depth and breadth of diversification goes beyond what a typical investor can achieve on their own, including sectors, geographies, market capitalizations, currencies, and management styles. Such funds may often include alternative investments such as real estate or commodities. Fund managers are empowered to be responsive to changing market conditions wherein they can reduce riskier exposures, typically equities, during market volatility or increase risky exposures during quieter times, steering the portfolio in pursuit of the desired outcome. No portfolio manager can be an expert in all asset classes which leads multi-asset portfolio managers to compare the relative value opportunity of one asset class against another, but leaving the security selection to the experts within that asset class or category by investing in other actively managed funds.
There is a wide variety of multi-asset funds to choose from, amongst which are funds designed to perform according to an investor’s tolerance for risk. These funds can range from conservative to others with a more aggressive risk tolerance. By definition, growth-oriented funds would have much higher allocation to equities, with maybe as much as 90%. Investors generally seek growth, but most investors are constrained – in part - by a threshold of risk that they are willing to accept. Investing in traditional and, where appropriate, alternative asset classes, risk-controlled growth strategies are designed to offer a diversified and actively managed portfolio that aims to achieve growth-like returns but with lower volatility than equities. Controlling the level of overall portfolio risk over time will yield a smoother return profile, which is beneficial to investors.
If nothing else, financial crises throughout history have taught us that real diversification requires the understanding and management of all risk and return dynamics. Investors are increasingly recognising the need to move beyond a simple check-list of products. Multi-asset investing is a powerful technique to help investors achieve the outcomes they desire.
Adrian Borg, CFA is a Lead Portfolio Manager at BOV Asset Management Limited.
The writer and the company have obtained the information contained in this document from sources they believe to be reliable, but they have not independently verified the information contained herein and therefore its accuracy cannot be guaranteed. The writer and the Company make no guarantees, representations or warranties and accept no responsibility or liability as to the accuracy or completeness of the information contained in this document. They have no obligation to update, modify or amend this article or to otherwise notify a reader thereof in the event that any matter stated therein, or any opinion, projection, forecast or estimate set for the herein changes or subsequently becomes inaccurate. BOV Asset Management Limited is licensed to conduct investment services in Malta by the Malta Financial Services Authority. Issued by BOV Asset Management Limited, registered address 58, Triq San Żakkarija, Il-Belt Valletta, VLT 1130, Malta. Tel: 2122 7311, Fax: 2275 5661, E-mail: [email protected], Website: www.bovassetmanagement.com. Source: BOV Asset Management Limited.