Multi-Asset Strategies: Can you beat it?
Investors have for years used a 60% allocation to equities and a 40% allocation to bonds (sometimes inverted) as a simple and informal benchmark for an investment strategy. As naive as such a benchmark may be, it can prove irksomely difficult to beat. Investors as sophisticated as some of the leading US university endowments, such as Harvard Management Company, have found a 60/40 benchmark hard to beat and have the negative press clippings to prove it.
The unprecedented increase in investment strategies available even to smaller institutional and individual investors over the last decade, through instruments like exchange-traded funds, has also facilitated the rise of multi-asset strategies, be they diversified growth funds (DGFs) in the UK, other more sophisticated absolute-return multi-asset strategies, or the particular genre of risk parity fund pioneered by the likes of Bridgewater.
Given the diverse range of return targets of multi-asset funds, a 60/40 benchmark can be a useful, if limited, parameter for measuring return. As we explore in the first article in this report, it also presents a useful thought experiment: at a time when asset-class returns and volatility are low, bond yields depressed to negative, and correlations of mainstream asset classes rising, how do multi-asset investment managers and CIOs intend to position their portfolios to beat a 60/40 benchmark?
Larger institutional investors with a return-seeking portfolio might increase their own resources, or use a fiduciary manager to do so. For smaller investors and their advisers – the target audience for many of the approaches discussed in this report – the answer could be to refine their thinking about multi-asset approaches. Simpler, passive multi-asset strategies may be better for some.
A recent study by Willis Towers Watson of DGFs, perhaps predictably contested by multi-asset managers, found that some funds derive most of their return from beta exposure, although they do score well in terms of reaching target return and volatility levels (see page 6).
DGFs themselves are a heterogeneous bunch of funds, ranging from active to passive approaches and with varying portfolio construction methods and asset-class exposure (see profiles on page 10).
IPE has increased its coverage of multi-asset approaches in recent years, also looking at risk-based multi-asset approaches, including risk parity, in our regular Risk & Asset Allocation Special Report. The current report includes an assessment of risk parity funds on page 20.
Asset allocation skill is at the heart of portfolio construction. As the range of multi-asset approaches and strategies continues to broaden, investors and advisers will also need to apply increasingly sophisticated metrics to assess return, risk and overall added value alongside cruder measures such as a 60/40 portfolio benchmark.
Liam Kennedy, editor, IPE