Better analysis required for multi-asset approach, argues Schroders

Funds in the popular multi-asset category need a better approach to analysis than focusing only on asset classes, says Schroders’ Nicolaas Marais.

Financial markets have given ­investors many hard lessons since 2007. A primary example was the over-reliance on capital-based asset allocation and portfolio construction that provided limited diversification and downside risk protection.

The problems that came out of these lessons have contributed to a revival of interest in multi-asset and, more specifically, strategic beta strategies. These are diversified across various asset classes and managed in such a way as to protect against capital loss in crises, as much as ­generating healthy risk-adjusted returns in better climates.

Multi-strategy funds took in €5.3bn of net new business in Europe last year, according to Lipper FMI FundFile. This made them the second most popular strategy, after the ­combined ‘other’ grouping, and of only three discrete strategies to take in net new money. Their popularity shows few signs of slowing in 2012.

As one Swiss private bank ­proponent says: “Clients have not ­forgotten how hard investing has been since 2007, and multi-asset is a useful solution to some of the hard lessons they have learned.”

A popular choice

It is also increasingly evolving into more of a strategy focused on outcomes. The historic 60/40 equities/bonds split of balanced funds is increasingly recognised as sub-optimal. A diversified growth approach, encompassing more asset classes and driven by their underlying risk premia, is becoming more accepted as a better alternative.

At Schroders, Nicolaas Marais (pictured)heads the €50bn multi-asset and portfolio solutions unit, which has a global team approaching 100.

They have been working on the evolution of multi-asset strategies focused on solving clients’ problems. They think broadly – as the term ‘multi-strategy’ suggests – but also differently, in an evolution of what already exists.

Marais understands the popularity of the multi-strategy model, but he also says that historic diversification models spanning many asset classes have disappointed, and will again disappoint fund buyers, if a more s­cientific approach is not taken.

In 2008, global and European bonds were the only asset classes of ten monitored by Credit Suisse to avoid double-digit losses. Last year saw greater dispersion, but as equities fell by 10%, the historic diversifiers of hedge funds lost 5% and commodities 13%, according to data providers.

Marais says: “One of the big crises the industry still faces is that traditional diversification embedded in strategic asset allocation and portfolio construction produce unsatisfactory outcomes for many investors.

“They ask managers: ‘Why did you buy all different asset classes if they all act in unison during a crisis, and how will my portfolio respond if we enter a period of stagflation?’”

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