The merits of multi-asset investing in volatile and uncertain times
Multi-asset funds are popular investment vehicles. We discuss why this trend towards multi-asset investing is a healthy development.
the majority of investors and their advisers continue to place their faith in the South African multi-asset class category. Having grown in popularity in recent years, multi-asset class funds now represent more than half (51% as at end September) of the Collective Investment Schemes (CIS) industry assets compared to 29% five years ago, according to data from the Association of Savings and Investment SA (Asisa).
This type of fund is designed to offer investors a simpler investment solution – one with exposure to varied sources of return and lower levels of risk due to broad diversification – and we believe this trend towards multi-asset investing is a healthy development, particularly amidst increasing uncertainty and volatility in markets worldwide.
We acknowledge that in choosing the most appropriate fund or combination of funds much depends on the unique needs of investors and the quality of the investment products available to them.
However, for the majority of investors an investment in a credible multi-asset fund often makes more sense than investing in underlying building-block funds. Our reasons are threefold:
1. The opportunity to achieve higher returns
Asset allocation is the most important decision you make in investments.
The ultimate value added by good asset allocation decisions dwarfs the alpha that can be delivered in the underlying building blocks. This is the big call and you need to get it right, so it makes sense to leave the asset allocation decision to someone who has the appropriate skill set and experience.
In addition, there may be flaws in the way asset allocation decisions are made when following a building-block strategy. For example, asset class weightings may be rebalanced to certain long-term target weightings. Often, this is rule-based and mechanistic, without taking into account risk/return considerations as relative valuation levels change over time.
Typically, it is also performed fairly infrequently. Given that the future is unlikely to look like the past, formulating target weightings based on historical returns is a significant risk in our opinion.
Multi-asset funds can make full use of all the asset classes.
Often the building-block approach involves a simple allocation to vanilla bonds, equity and cash. Many of these funds end up without meaningful allocations to important asset classes like property and inflation-linked bonds, and to some of the smaller asset classes like commodity exchange-traded funds and preference shares.
2. The opportunity to better manage – and thereby reduce – risk
Risk is best managed by a manager who has sight of the overall portfolio. Detailed knowledge of the exposures of the underlying building blocks allows for a fuller understanding of the trade-off between risk and return.
For example, a domestic equity building block heavily invested in resource stocks has very different fundamentals to one heavily invested in rand-hedge dual-listed stocks. Without that level of granularity, managing risk is almost impossible.
Good multi-asset fund managers spend enormous amounts of time:
Thinking through the risk of unintended positions that can occur in the overall portfolio from views taken in each of the underlying building blocks; and
Identifying the best risk-adjusted returns across all asset classes and sectors, and across the capital structure of every company.
3. Multi-asset funds can be tailored and flexed
This type of fund is designed to offer investors a simpler investment solution – one with exposure to varied sources of return and lower levels of risk due to broad diversification.
In the 1990s, the classic balanced fund, with a risk budget reflecting the requirements of typical pre-retirement investors, was all that was available. However, the early 2000s saw the launch of absolute return multi-asset funds, with risk budgets aimed at the typical retired investor.
In addition, many managers now run bespoke multi-asset funds with risk budgets and return targets that differ from the classic pre- or post-retirement funds. For example, the Coronation Market Plus Fund has the ability to invest up to 35% in offshore assets and can have up to 100% invested in equities – more than the Regulation 28 limits applicable to retirement funds allow. This makes it ideal for discretionary investors who are not saving within a retirement vehicle.
The significant allocation of capital into multi-asset funds is a healthy development in the South African market. It is a market that is fairly unique in global terms, as it has quite a few managers with good track records in both asset allocation and security selection.
In the years ahead, if expectations of lower real returns prove correct, alpha becomes a must-have and not a nice-to-have. For this, active asset allocation is needed – and a credible multi-asset class fund can provide it.