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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 This document is for Investment Professionals only, and should not be relied upon by private investors. This document is provided for information purposes only and is intended only for the person or entity to which it is sent. It must not be reproduced or circulated to any other party without prior permission of Fidelity. This document does not constitute a distribution, an offer or solicitation to engage the investment management services of Fidelity, or an offer to buy or sell or the solicitation of any offer to buy or sell any securities in any jurisdiction or country where such distribution or offer is not authorised or would be contrary to local laws or regulations. Fidelity makes no representations that the contents are appropriate for use in all locations or that the transactions or services discussed are available or appropriate for sale or use in all jurisdictions or countries or by all investors or counterparties. This communication is not directed at, and must not be acted on by persons inside the United States and is otherwise only directed at persons residing in jurisdictions where the relevant funds are authorised for distribution or where no such authorisation is required. Fidelity is not authorised to manage or distribute investment funds or products in, or to provide investment management or advisory services to persons resident in, mainland China. All persons and entities accessing the information do so on their own initiative and are responsible for compliance with applicable local laws and regulations and should consult their professional advisers. Reference in this document to specific securities should not be interpreted as a recommendation to buy or sell these securities, but is included for the purposes of illustration only. Investors should also note that the views expressed may no longer be current and may have already been acted upon by Fidelity. The research and analysis used in this documentation is gathered by Fidelity for its use as an investment manager and may have already been acted upon for its own purposes. This material was created by Fidelity International. Past performance is not a reliable indicator of future results. This document may contain materials from third-parties which are supplied by companies that are not affiliated with any Fidelity entity (Third-Party Content). Fidelity has not been involved in the preparation, adoption or editing of such third-party materials and does not explicitly or implicitly endorse or approve such content. Fidelity International refers to the group of companies which form the global investment management organization that provides products and services in designated jurisdictions outside of North America Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. Fidelity only offers information on products and services and does not provide investment advice based on individual circumstances. 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