A multi-asset portfolio can be a defensive rock

WHERE is the proverbial crystal ball when you need one?

Uncertainty, trade wars, Brexit, oil prices, a slowing global economy … plenty to be worried about.

So is multi-asset investing the answer?

Money Marketing magazine thinks it could be.

It stated: “It has often seemed as if uncertainty is the only certainty for asset managers, advisers, and their clients.

“Amid geopolitical developments and a slowing global economy, an increase in market volatility is a significant possibility. That’s why we believe that long-term, multi-asset investing will continue to offer one significant advantage: the protection offered by portfolio diversification.”

Of course, the $64 000 question is: when might the market turn?

After all, the world has enjoyed a 10-year period of largely bumper returns, so something has to give, doesn’t it?

The temptation is to shift into gold, bonds or cash.

But timing the market is near impossible and the problem is that if you sell out and nothing happens then you look a fool, or you sell out, stay out too long, and then you may miss the bounce-back.

For long-term investors, the solution lies in having a well-diversified portfolio, believes Fidelity investment director Tom Stevenson.

He recommends using multi-asset funds as a low-cost way of spreading risk across asset classes, sectors and regions.

“Because we do not have a crystal ball, we can only seek to minimise the ups and downs of our investments by putting our eggs in a variety of baskets,” he told the FT.

Absolute return funds are another tool that investors can use to hedge risk.

These funds are designed not to lose as much as equities when markets turn, at the cost of not performing as strongly in the good times.

Also speaking to the FT, Adrian Lowcock, head of personal investing at Willis Owen, stated: “For example, in a trending market, like the equity rally in the first half of 2019, momentum tends to drive asset prices for an extended period of time. In this environment, fixed rebalancing of a multi-asset portfolio without any discretion would see the portfolio sell the best performing assets and buy into the weakest, effectively cutting winners and adding to losers and resulting in a lower return than if you had left positions alone.

“Equally, when the tide starts to turn on a trend like the equity rally, having the process – and the remit – to identify and sell over-valued assets (or buy under-valued assets) is advantageous. Active management of the allocation enables a manager to potentially enhance returns through the ups and downs of markets.”

Active management of a portfolio is very different from blindly following index-tracker funds which track the performance of a particular index, for example the FTSE 100 or the S&P 500.

Active managers believe that through expertise, timing and pinpointing opportunities in the market, they can achieve higher returns. Using a globally diversified multi-asset approach, their experience and forensic share analysis will tell them when to get into or out of a particular stock or bond. The advantage with active managers is they can adjust their portfolios to minimise potential losses. They can avoid individual shares or bonds, sectors, industries or even countries that they believe may underperform over a certain time period.

Diversified investments won’t move in the same direction at the same time. If some of your investments are up while others are down, you’ve got diversification.

Think of diversification as a Christmas tree: Red and green together means you’ll fair better in all weather.

Perhaps a particularly apposite analogy given how many High Street stores already have their

Christmas wares on display!

Trevor Law is managing director of Eastcote Wealth Management, chartered financial planners,

based in Solihull. Email: tlaw@eastcotewealth.co.uk

The views expressed in this article should not be construed as financial advice