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?’”