Download The case for multi asset investment

This is for investment professionals only and should not be relied upon by private investors
JANUARY 2016
The case for multi asset investment
All investment is based on one key question: how can we use markets to
achieve financial goals? In recent years, the investment industry has
become more explicitly focused on building ‘solutions’, responding to
growing investor demand for comprehensive strategies to meet their
investment needs. These can include a sustainable income, capital
preservation, protection against inflation or steady capital appreciation
within a low volatility framework.
Multi asset investing can play an important role in meeting these needs,
with its ability to harness the long-term characteristics of asset classes.
Allocating to a range of asset classes can also diversify risk and deliver a
more consistent set of outcomes over the long term.
THE BASIS OF MULTI ASSET INVESTING:
THE DIFFERING CHARACTERISTICS OF ASSET CLASSES
The concept of multi asset investing is based on the understanding that asset classes
behave differently over time. In the past, investors have typically chosen a variety of
equity, fixed income and money market products to meet their long-term financial
objectives. Each of these single asset class strategies have their own characteristics and
benefits, but investors had to assemble the right combination to achieve their risk/return
objectives and manage these investments on an ongoing basis. Multi asset solutions aim
to resolve this traditional investor dilemma of which asset class to include and when.
Instead of simply offering access to a single investment universe and its inherent
properties, a multi asset approach can be designed to meet the overall objectives of
clients. By understanding asset classes and their characteristics (Table 1), portfolio
managers can build a strategy suited to the individual needs of each client.
AT A GLANCE
 Investors are increasingly
demanding outcome-focused
solutions that are designed to meet
their investment needs. Multi asset
portfolios combine a range of asset
classes to deliver specific objectives
over time.
 Multi asset portfolios can deliver a
smoother journey over market
cycles versus single asset class
strategies. They do this by
spreading risk across a range of
asset classes rather than there
being a concentration of risk in a
single asset class.
 A range of assets provide the
flexibility to respond to changing
market conditions.
 Fidelity Solutions, the specialist
multi asset team at Fidelity
International, offers a range of multi
asset solutions, combining a
number of sophisticated investment
disciplines to achieve the right
outcomes for investors.
Table 1. Asset classes each have different characteristics
Traditional
Government &
Investment Grade bonds
Cash








No capital loss
Highly liquid
Typically a low return
Value is eroded by inflation
Equities
 Historically outperform cash and
Less volatile than equities
Stable income delivery
Historically, returns lag equities
Returns driven by interest rates
bonds
 Benefits from growth
 Volatility can be high
 Can see periods of negative
returns
Real Estate
Commodities
 Low levels of correlation with other


asset classes
Likely to keep pace with inflation
Illiquid




Low correlation with equities
A hedge against inflation
No natural income
Can be highly volatile
Alternatives
 Low correlation with other assets
 A variety of drivers and return
Alternatives


High Yield and EM Debt
characteristics
Can be illiquid
Can be complex
 Diverse asset class
 Can provide higher yield and

inflation protection
Riskier than government bonds
but less risky than equities
Currencies




Uncorrelated source of return
Can increase yield
Zero-sum game
Movements are difficult to predict
Source: Fidelity International, January 2016. For illustrative purposes only.
Multi asset solutions can also help investors access a broader universe of asset classes
than they otherwise may be able to. Alternatives, for example, often require high minimum
investments, or involve a significant amount of research time and expertise to understand
the risk/reward trade-off. Through a multi asset approach, investors can benefit from a
more diversified portfolio with risk spread more widely across traditional and nontraditional asset classes. Whether focused on growth, income, capital preservation or
other objectives, a multi asset approach can meet the varied and changing needs of
investors over their financial lifetime.
HARNESSING THE LONG-TERM CHARACTERISTICS OF ASSET CLASSES
Diversification is a key principle of multi asset investment. Over time, individual asset
classes have distinct behaviours and offer different risk and return outcomes. While
equities can offer strong capital growth, for example, bonds have more defensive
properties and tend to perform better during periods of market volatility.
Understanding the behaviour and characteristics of asset classes helps to determine the
right combination to deliver a specific long term outcome. This long term blend is
commonly referred to as the Strategic Asset Allocation (SAA). For example, a portfolio
with a high proportion of risk assets (such as equities) is likely to provide a higher level of
return for investors versus one which is skewed towards lower-risk asset classes (such as
bonds or cash). The charts below show a simple example of expected risk and returns for
a strategic asset allocation of equities, bonds and cash compared to single bond or equity
strategies. They demonstrate how combining the different properties of asset classes can
deliver a smoother profile over time.
Of course, not all multi asset funds have an SAA. Some, such as total return funds,
operate on the basis of having the full flexibility to allocate to individual asset classes, with
the first question being whether they should own an asset class at all, before considering
the overall exposure level.
“There is a shift in the multi asset
space towards a greater
emphasis on client outcomes,
which is certainly a positive
move. We’re seeing increased
focus on providing a fullyformed solution for clients that
meets their needs in the long
term, while managing risk and
volatility along the way and
working within a specific
framework.
“I expect this trend to continue
as clients become increasingly
aware of the need to take
informed risk with their
investments.”
James Bateman
Head of Portfolio Management
Fidelity Solutions
Charts 1 & 2. Combining asset classes offers a smoother journey
Returns
Volatility
600
30%
500
25%
400
20%
300
15%
200
10%
100
5%
0
1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
100% Bonds
100% Equities
Multi-Asset
0%
1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
100% Bonds
100% Equities
Multi-Asset
Source: Fidelity International, December 2015. Example is USD based. Multi asset blend defined as 10% cash, 50% equity, 40% bonds. Indices used for; Cash: one month
LIBOR, Bonds: Barclays Global Agg. Total Return Index Value Hedged USD, Equity: MSCI AC WORLD
RESPONDING TO CHANGING MARKET CONDITIONS
While multi asset investors can harness the intrinsic characteristics of asset classes to
give a long-term portfolio blend, an effective Tactical Asset Allocation (TAA) process can
add value over the shorter term. TAA seeks to generate additional returns by adjusting
the asset allocation of a portfolio as market conditions change.
We believe that markets are generally efficient at pricing in today’s information, but are
relatively poor at anticipating the future. For example, periods of pronounced volatility
stemming from factors as diverse as central bank policy or geopolitical tension can create
irrational pricing of assets. These periods of volatility are a double-edged sword,
presenting both risks and opportunities for investors as market prices fluctuate.
More generally, asset classes will respond in different ways to various market conditions
over the economic cycle. In a ‘stagflation’ environment such as between June 2002 and
March 2003, commodities were the best performing asset class, with inflation being
fuelled by higher raw material prices. In such a low growth environment, equities
underperformed, but did better in the ‘recovery’ phase, when growth was strong and
above trend. Navigating these changing market conditions can be a challenge and time
consuming for investors. A multi asset strategy managed by an experienced team can
offer a solution for investors who wish to flex their portfolio to take advantage of dynamic
market conditions and the opportunities this brings.
Chart 3. Asset class performance driven by different market conditions
Reflation
(May 2001 – June 2002)
Stagflation:
(June 2002 – March 2003)
Recovery
(March 2003 – February 2004)
Fixed Income performs well
Equities underperform
Risk assets perform well
150
125
100
75
May-01
Sep-01
Jan-02
May-02
Jun-02
Equities
Sep-02
Nov-02
Commodities
Feb-03
Mar-03
Bonds
Jun-03
Oct-03
Jan-04
Cash
Source: Fidelity International, January 2016. This represents the opinion of the Portfolio Manager. Equities = MSCI World Total Return; Commodities = Bloomberg Commodity Total
Return; Bonds = Barclays United States Aggregate Government Bond; Cash = 3M USD LIBOR. Example is unhedged USD.
IDENTIFYING THE RIGHT BUILDING BLOCKS
But having an investment view, either on the right blend of asset classes over the longterm or in response to shorter-term market conditions is only part of the process. The other
key element of multi asset investing is finding the right building blocks to implement
investment views. This involves analysing the opportunities offered by active managers,
passive ‘index-tracking’ instruments or individual securities.
Chart 4. Talent counts when choosing an active manager, but extensive resources are needed to seek it out
250%
Best performing
200%
112.6%
Morningstar Global Large Cap Blend
150%
33.2%
100%
Worst performing
50%
-23.1%
0%
2011
2011
2012
2012
2013
2013
2014
2014
2015
2015
2016
Source: Fidelity International, Morningstar, December 2015. Chart shows best and worst performing funds across the Morningstar Global Large Cap Blend
We believe that actively managed strategies can add real value over time for investors, but
true ‘investment skill’ is scarce and requires dedicated resources to seek it out. As shown
in Chart 4, the difference this ability can make is significant, with skilled managers able to
consistently outperform their peers.
Difference =
135.7%
Equally, passive strategies can be useful in providing cost-effective and broad-based
market exposure. Even here, however, careful thought is needed, as passive instruments
differ from one another; such as in the accuracy with which they track an index or the
liquidity that they provide. The risks of each vehicle also vary and it is important to
understand the nature and risks of their exposure before an instrument is included in a
portfolio.
Not only is strategy selection time consuming, but it also requires a significant level of
resources and investment experience. However, the selection of rigorously researched
investment vehicles can deliver strong benefits for investors when combined in
dynamically managed portfolios.
CONCLUSION
We believe that multi asset investment offers a compelling opportunity for investors, who
can benefit from a portfolio which is designed around their specific objectives and attitudes
to risk. A multi asset portfolio manager can harness the long-term behaviour of asset
classes, blending them correctly based on their risk and return characteristics over time.
Multi asset portfolios also offer a high degree of flexibility and are able to take advantage
of both traditional and non-traditional asset classes. This diversifies risk and sources of
return, with multi asset investors also able to exploit the relationship between market
cycles and individual asset class performance.
Ultimately, we believe in determining investors’ needs and designing the investment
solution around these. An investor’s needs are the first consideration: are they looking for
capital growth and preservation? Income? Low volatility? Multi asset approaches are built
to deliver these aims, harnessing the varied characteristics of asset classes to meet
investment objectives and respond to client needs.
KEY BENEFITS OF MULTI ASSET
FUNDS








Exposure to the different
characteristics of asset classes
Diversification across both
traditional and non-traditional
investments
Smoother profile of returns over
time
Lower volatility than single asset
class strategies
Expert asset allocation over the
long term and in response to
shorter-term market dynamics
Access to the right building
blocks, selected by experienced
investors
A single portfolio to monitor
Cost effective access to
alternatives and specialist
investment vehicles
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