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The best approach

Cover of Multi-Asset Investing by Yoram Lustig The objectives vary, from generating returns or income, through matching liabilities or saving for retirement, to providing for the family. Multi-asset investing can be a solution for all these diverse investment objectives.

The objectives vary, from generating returns or income, through matching liabilities or saving for retirement, to providing for the family. Multi-asset investing can be a solution for all these diverse investment objectives.

When using a multi-asset approach, investors need to consider their assets, liabilities, return objectives, risk appetite, specific circumstances, geographic location and, in the case of individuals, their investor psychology. These factors, together with the current economic and capital market conditions, allow investors to construct multi-asset portfolios to meet their specific investment objectives.

Multi-asset investing has gained popularity in recent years and some have questioned whether it is here to stay or just a passing fad. The fact is that both individual and institutional investors invest in multi-asset portfolios to preserve and/or grow wealth or assets. Multi-asset portfolios are everywhere, they always have been and they are here to stay. Multi-asset portfolios are the past, present and future of investment management and they are certainly not a passing fad, as much as investing itself is not.

Multi-asset investing is managing portfolios that include investments in more than a single asset class. There is no definitive definition of an asset class, but broadly it is a group of investments that share similar risk and return characteristics, perform similarly in certain market environments, respond similarly to financial events, and are subject to similar legal and regulatory definitions. Equities, bonds and cash are examples of traditional asset classes.

A relatively simple multi-asset portfolio may invest in equities and bonds in a fixed target allocation; for example, 60 per cent domestic equities and 40 per cent government bonds. Such portfolios are commonly referred to as a balanced fund. A complex multi-asset portfolio may invest in a range of globally diversified asset classes, use multiple investment vehicles, managed by different portfolio managers, include strategic and tactical asset allocations, and utilise derivatives, with all activities dynamically managed. This is commonly called a multi-asset fund.

A proper multi-asset portfolio is truly diversified across a range of asset classes, asset allocation is dynamically managed to position the portfolio to current market conditions and investment selection covers the full spectrum of investment choices. Multi-asset investing has moved a long way from the traditional, equity-bond mix. Investors now expect investment solutions tailored to their financial needs, not just portfolios aiming to outperform a market index, such as the S&P 500 or FTSE 100. Beating an index is not part of any investor?s real needs. Multi-asset investing should be linked to the real investment needs or objectives.

The activities of managing multi-asset portfolios include top-down asset allocation, bottom-up investment selection, portfolio construction to put everything together, and implementation, as well as risk management and performance reporting. These activities are typically more complicated for a multi-asset portfolio than they are for a single asset class, long-only portfolio.

Multi-asset portfolios tend to invest globally rather than solely domestically. Equity portfolios whose investment universe is the S&P 500, FTSE 100 or DAX 30 Index invest in stocks of companies registered in a single country with a single currency. Multi-asset portfolios typically invest across multiple countries and multiple currencies, while they normally have a single base currency. This introduces additional complexities of cross-border investing, across different timezones and currencies.

Multi-asset investing covers many investment disciplines. It is markedly different to managing an active, single asset class portfolio, the objective of which is outperforming an index or a peer group sector. When an equity portfolio manager aims to outperform an index, the main activities are selecting favourable securities, ensuring that the portfolio is different from the benchmark and trying to outperform it within the risk parameters and investment constraints. A multi-asset portfolio manager, however, often focuses on asset allocation and selecting the managers who select securities, rather than the securities themselves.

The benchmark is sometimes a fuzzy composite of a few indexes and is not as clearly defined as a published equity index, such as the S&P 500 Index. The risk objectives can combine various parameters and the return objective can be more than outperforming a benchmark.

Multi-asset investing is clarifying and stipulating the investment objectives and combining different activities with the aim of meeting these objectives.

Multi-asset portfolios can be large, complex and can cover many asset classes. A single person, as skilled and talented as they may be, normally does not have all the necessary skills to manage such portfolios. Managing multi-asset portfolios often requires a multidisciplinary team approach. It requires a joint effort from portfolio managers, strategists, asset allocators, implementers, risk managers and performance analysts.

An equity portfolio manager directly controls the security selection decisions. While a multi-asset portfolio management team must have the ultimate responsibly and accountability for the entire portfolio, the team may not have direct control over all the investment decisions. Some decisions, such as security selection, may be delegated to other portfolio managers or outsourced to external managers. The multi-asset portfolio manager must have the flexibility to hire and fire underlying portfolio managers. However, the success or failure of a multi- asset portfolio depends on the joint efforts of all parties involved in managing the portfolio.

The list of activities for managing multi-asset portfolios is long and multi-asset investors must prioritise based on the importance of the different elements (judged by contribution to risk and return to the overall portfolio) and the available resources. Asset allocation is one of the most important investment decisions and should be given the appropriate attention since it links portfolios with investors? long-term investment objectives. Security selection, while critical to the overall success of multi-asset portfolios, can be delegated to other portfolio managers, outsourced to external managers and/or accessed through passive investments where and when appropriate. Multi-asset investors must have a robust manager and investment selection process. Success depends on successful investments.

Investor types

Most private and institutional investors invest in multi-asset portfolios. An individual?s pension plan is probably diversified across a few asset classes, such as equities, bonds and cash (if not, the individual may consider seeking a better financial adviser). Including a residential house, whether it is considered an investment or a home, the individual has exposure to real estate as well. Human capital (future income) is another asset class, which may be considered as part of a portfolio (although it is tricky to do so). Most individuals are, therefore, multi-asset investors.

Private investors are different from institutional investors in many aspects, such as different investment objectives, constraints and psychologies. Emotions play an important role with private investors, in particular since their portfolios are typically their personal wealth and savings, which have been accumulated through hard work or inheritance and will determine their future and that of their families. When the family?s welfare is involved, individuals get emotional; and rightly so.

Yoram Lustig is author of Multi-Asset Investing: A Practical Guide to Modern Portfolio Management


Key points

A multi-asset approach can provide diversification benefits, enhance risk-adjusted returns and link portfolios with a wide range of investment objectives

A relatively simple multi-asset portfolio may invest in equities and bonds in a fixed target allocation

Multi-asset portfolios can be large, complex and can cover many asset classes
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