IA_Guide to multi-asset_18
Guide to multi-asset strategies – May 2018\\\\\\\\\
Mark Battersby on the coming \of age of the multi-asset space\
How has the world of multi-asset investing evolved during the past year? New investment approaches have certainly come to the fore as markets exhibit increased volatility and investors turn to different strategies in order to add value to their portfolios.
In this guide we explore how artificial intelligence is changing irrevocably the way in which investments are constructed and managed.
Are humans getting in the way of clear-headed, unemotional investment decisions? This is one of the angles we will consider in the following pages.
There is also a take on a highly active approach to managing a portfolio of eight primary asset classes, switching in or out of positions if there is no perceived chance of a positive return for the investor.
In contrast, we consider the rise in popularity of multi-asset risk-managed funds in comparison with traditional mixed assets.
Scrutiny of different styles of balanced funds reveals how they performed during the 2008 global financial crisis.
Last but not least, we argue that the investment proposition must be more clearly defined so advisers can convey with confidence to clients the ongoing benefits of a chosen solution.
An important underlying message is that selecting a multi-asset approach for clients means advisers cannot opt out of the investment space to focus on other aspects of financial planning.
Keeping up to speed with the complex and increasingly divergent mixed investment funds out there is one way of adding value.
Regulators worldwide now require much greater diligence from advisers and this is nowhere more evident than within the multi-asset sector.
‘Are humans getting in the way of clear-headed, unemotional investment decisions?’
Mark Battersby, editor,
Global macro uncertainty is proving to be a stroke of good fortune for the multi-asset sector, reports Mark Battersby
Multi-asset continues to be a popular and growing sector, spurred on by common sense and regulatory demand, and there is a wide array of strategies now available to suit client needs.
Multi-assets with consistent track records are not easy to find and the funds vary greatly in structure, management approach and fees.
Yet by mixing different asset types, an improved risk/return trade-off can deliver portfolio yields in excess of 5%, against a backdrop in the past few years of low growth and high volatility.
Alongside equities and corporate bonds, managers are embracing asset classes such as property, high yield, emerging market debt and other alternative investments.
An awareness of macro themes allows for a diligent overview of the strategies used by the fund managers making day-to-day decisions and helps guide clients in the right direction.
Investors are always faced with uncertainty, and there is a wide margin for error when forecasting returns, but the beauty of a multi-asset fund is that it has the potential to cover a multitude of bases in order to minimise risk.
A booming trade
The popularity of the approach is evidenced by the boom in sales of mixed-asset funds, according to the latest figures from one of the UK’s biggest investment platforms.
Fundsnetwork data reveals that the Investment Association’s Mixed Investment 40-85% sector held the top spot in the sales chart in March for the second month in a row.
Volatility Managed and the Mixed Investment 20-60% sectors took second and third place, respectively, indicating a strong appetite for more risk-averse assets. The Global sector climbed to fourth place.
Paul Richards, head of sales at Fundsnetwork, says: “March’s data indicates that as advisers approached the end of the tax year, they were becoming increasingly mindful of market uncertainty amid growing geopolitical concerns, using mixed investment and volatility managed sectors as they look to balance exposure within clients’ portfolios.
“Despite this risk-averse behaviour there were pockets of strong sales within the UK All Companies sector. As Brexit negotiations continue, it will be interesting to see whether this sector can gain further interest as the asset class is still largely unloved by international investors and asset allocators.”
‘Advisers mindful of market uncertainty amid geopolitical concerns are using mixed investment to balance exposure within portfolios’
Paul Richards, head of sales, Fundsnetwork
A spiky market
A Natixis Investment Managers survey of 200 professional fund buyers, responsible for selecting funds on private bank, insurance, fund of fund, and other retail platforms, also highlights concerns about market volatility.
Professional fund buyers have been expecting a spike in volatility for some time, the survey reveals. Almost eight in 10 (78%) respondents said they had been surprised that volatility has remained so low for so long and nearly half of them (49%) cited asset price volatility spikes as one of their top concerns for 2018.
However, the fund buyers were split as to what impact volatility has on their portfolios. Thirty-nine per cent said increasing volatility was a threat, while 38% anticipated a positive effect on portfolio performance.
Matthew Shafer, head of global wholesale at Natixis Investment Managers, says: “The split in opinion over the impact volatility will have can be interpreted in two ways. The downside opinion is likely built on the view that after a long period of steady growth we are due for a correction that will bring security prices back down to earth.
“On the upside, increasing volatility could signal higher return dispersions and greater potential to generate alpha.
“Whatever the interpretation may be, professional fund buyers are turning to active management to diversify their portfolios, mitigate risk and enhance return.”
The message is loud and clear: good diversification is key to a successful outcome for client portfolios, and both institutional investors and financial advisers are turning to mixed investments more than ever during these turbulent times.
‘Professional fund buyers
are turning to active management to diversify
their portfolios, mitigate
risk and enhance return’
Matthew Shafer, head of global wholesale, Natixis Investment Managers
Follow \the signs
As the global backdrop becomes increasingly uncertain investors should consider adapting their portfolios for these more volatile times
As we enter a new and more uncertain phase in the global economic outlook, the need for diversification has never been so prevalent.
Equity valuations remain stretched in many parts of the world, cash yields are almost non-existent and bond markets have enjoyed a 30-year bull run and now face the headwind of higher interest rates and the possibility of rising inflation.
Against this more uncertain backdrop, we strongly believe that diversified, yet high-conviction and actively managed, multi-asset portfolios are most appropriately placed to deliver superior gains.
A truly multi-asset strategy
As no single asset class performs well at all stages of the economic cycle, diversification is the key to smoothing out painful volatility. History suggests that better risk-adjusted returns can be achieved through the adoption of a multi-asset strategy.
It is a simple concept but the difficulty lies in choosing the right mix of assets at the most appropriate time.
At Apollo, we have the experience and expertise to manage portfolios of eight primary asset classes: equities, bonds, absolute return, currencies, private equity, commodities, property and cash.
By tilting the portfolios across these assets, depending on our outlook, we aim to protect investors during more turbulent times, while also looking to participate in the majority of longer-term market gains.
Central bank support waning
The performance of financial markets in the past few years has demonstrated that simple equity and bond portfolios have delivered satisfactory returns for clients.
The effect of global quantitative easing meant investors were paid handsomely often for doing very little other than following the stochastic models that simply required the past trend to push into the future. Despite the record low volatility, 2017 ushered in the end of this easier period for investors.
Monetary policy had been phenomenally loose for a number of years post the financial crisis of 2008 as global central banks remained tacitly behind the curve, inflation was suppressed, employment soared and GDP picked up across the world.
‘The volatility we have already seen in 2018 has demonstrated the requirement for a truly multi-asset strategy’
True multi-asset portfolio positioning
While it is easy to become too caught up on potential risks, it is hard to argue against the fact that we are now facing many new threats, as highlighted in the ‘Six signs for investors’ graphic on page 1. Against this backdrop, it is clear investors need to consider actively managed and well diversified portfolios.
The volatility we have already seen in 2018 has demonstrated the requirement for a truly multi-asset strategy. February’s inflationary driven sell-off saw both bonds and equities correlate and fall together.
We anticipate we will see more of this in the future and all of our portfolios remain very differently positioned to our peer group.
Our philosophy is to only hold assets we are confident can deliver a positive return and, as a result, we never hold underweight or relative positions. Simply put, if we do not like an asset class or a region we will avoid it.
As a result of this we have very little UK equity and UK bond exposure as the unknown future effects of Brexit mean the prospects for these assets are currently too hard to assess.
Outlook and portfolio construction
The recent surge in interest rate expectations means we continue to avoid broad exposure to the bond markets and remain focused on specific areas, such as short-duration high yield, where there is little sensitivity to interest rate changes.
The exposure towards UK commercial property and absolute return funds remains the most appropriate way to defend portfolios in the current environment.
In terms of equity, we have started to deploy some of the higher levels of cash that we have been holding.
This has seen us add new positions in the financial sector while we have also reintroduced technology exposure at lower prices in our higher-risk portfolios.
We continue to favour the cheaper markets, such as Europe, and those others where we feel global growth will have a greater effect, such as Asia and emerging markets, particularly Vietnam.
We believe we have the most appropriate investment strategy in place to generate positive returns through the rest of 2018. However, we remain vigilant and ready to act, able to move portfolios in either direction should the overall backdrop shift significantly.
ApolloMulti Asset Management LLP is the investment manager of both the Athena Global Cautious Fund and Athena Global Opportunities Fund.
Please remember that the value of your investment may fall as well as rise and is not guaranteed. You may not get back your initial investment. Past performance is not an indicator of future performance. Nothing in this article should be construed as investment advice.
times are \changing
There has been a huge increase in the popularity of multi-asset risk-managed \funds during the past few years.\ Aviva Investors looks at how this \compares with a traditional, \mixed-asset approach
Funds that sit within the Investment Association (IA) Mixed Investment sectors have long been an integral part of most clients’ pension and investments. Yet a consequence of these funds existing in the same sector is the presence of a peer-group benchmark. Inevitably, this prompts managers to assess rival funds in an effort to outperform their peers.
This can encourage a herd-like mentality of increased risk in the attempt to achieve superior returns and a higher quartile ranking. What’s more, given the significant changes to the financial and regulatory landscape in recent years, we should ask if the Mixed Investment sector is still the most suitable solution for investors and retirement savers.
What are the rules?
The table (right) shows the requirements that a fund must meet to sit in the various IA Mixed Investment sectors.
To understand if these criteria make sense to investors and retirement savers, here is an example comparison:
Theoretically, both funds in this example could sit within the ‘balanced’ Mixed Investment 40-85% sector. In other words, a fund manager could create two different portfolios: one is high risk and the other is much lower risk but both funds could sit within the Mixed Investment 40-85% sector.
The practical implication is that the fund may align to a client’s attitude for risk at point of sale but this does not necessarily provide ongoing suitability.
Another key factor for any portfolio is to observe how it performs during periods of market distress, a good example of which was the 2008 crisis. The dispersion of returns within the Mixed Investment 40-85% sector in 2008 can be seen in the diagram on page 2.
The best performer generated almost 10% in a challenging year while the worst lost nearly 40%. In absolute terms, this is a near 50% dispersion between the best and worst performer. However, the more condemning statistic is that 10% of funds in the sector underperformed the FTSE All-share.
Theoretically, the funds sitting within the Mixed Investment 40-85% sector, given their more diversified approach, should have been better positioned to limit losses during a period of market distress.
This highlights one of the dangers of following a peer group benchmark and why in some cases contemporary alternatives are more appropriate.
‘A condemning statistic is that 10% of funds underperformed the FTSE All-share’
The next generation
Multi-asset and multi-manager solutions surfaced in the 2000s and have continued to grow in popularity since the Retail Distribution Review (RDR). In the wake of the RDR, advisers are now tasked with meeting ongoing client suitability requirements, with risk profiling being one of the most important components in deciding suitability.
The IA Volatility Managed sector was launched in April 2017 and it contains funds that target returns within specified risk parameters.
At launch, the sector had 83 funds with combined assets under management of £19.3bn. Importantly, the IA Volatility Managed sector does not impose any investment constraints like the various IA Mixed Investment sectors, which gives fund managers greater freedom to manage their portfolios more effectively.
Risks: Past performance is not a guide to future performance. The value of an investment and any income from it can go down as well as up and can fluctuate in response to changes in currency exchange rates. Investors may not get back the original amount invested. Important information: This commentary is not an investment recommendation and should not be viewed as such. Except where stated as otherwise, the source of all information is Aviva Investors as at 31 May 2017. Unless stated otherwise any opinions expressed are those of Aviva Investors. They should not be viewed as indicating any guarantee of return from an investment managed by Aviva Investors nor as advice of any nature. WM59242 04/2018
The context \of risk
Daryl Roxburgh, global head of \Bita Risk, tells Ian Cornwall why \context is king in client risk-profiling\
Investment suitability is high on the global regulatory agenda. In this exclusive interview, Ian Cornwall, director of regulation at the UK’s Personal Investment Management & Financial Advice Association, asks Daryl Roxburgh, global head of Bita Risk, how wealth managers can really satisfy suitability requirements, while also maintaining investment choice in an increasingly multi-asset world.
Ian Cornwall (IC): What is your assessment of all the different risk-profiling tools on the market? Are there any questions wealth managers should be asking but aren’t?
Daryl Roxburgh (DR): Many tools are based on psychometric tests that assess the individual’s attitude to risk in isolation but we seek to do something different.
We believe you should first of all explain risk, second, seek a common understanding of risk and third, look at risk in the context of the particular aim and objective of a given portfolio. People have different acceptance levels for risk depending on their goals.
Someone who considers themselves a risk taker may want to limit risks on a child’s school fees portfolio, for example. They have to pay those fees and so require a high degree of certainty of being able to achieve that goal.
In contrast, as a pension portfolio may have 20 or 30 years to run, you can afford to take on more risk because your ultimate time horizon is very long.
‘There are firms using asset allocations provided by software vendors and they have little real understanding of the assumptions made or the process used’
IC: Are there any questions wealth managers don’t ask of software providers that they ought to?
DR: Yes, many! First, how does the questionnaire output tie in with the investment proposition?
Second, are the questions relevant to the real-life objectives of that client? By that I mean asking whether it is for the client’s long-term pension or a short-term reserve, not if it is balanced or growth.
Third, do the questions help the client understand risk rather than just being a tick-box exercise?
Fourth, and perhaps most important, does the tool integrate with the firm’s investment process, giving it control and ensuring the tool is consistently applied?
There are firms using asset allocations provided by software vendors and they have little real understanding of the assumptions made in them or the process used. You have to ask how they can be sure they are taking the client down the right path.
They have ticked the box and give the impression of doing so but there is no real connection between the questionnaire answers and the suggested portfolio.
Phrases such as scientific and stochastic process are bandied about but there is a distinct lack of comprehension or an ability to question or explain.
IC: What’s the direction of travel here? What kind of developments are wealth managers asking for?
DR: Many wealth managers are seeking what we call a ‘four-eyes review’, where if you want to vary the profile of a client from the questionnaire output, it needs to go through a quality assurance process.
Self-completion is also a trend, where firms want clients can complete a questionnaire electronically and update their manager prior to their annual review. We are doing a lot of work on integrating with portals and client relationship management systems.
We predict ‘gatekeeper’ questionnaires could be another big development, given the number of firms that are launching portfolio services with smaller thresholds.
There are a series of questions clients must answer before proceeding to the main profile questionnaire. If the client is unable to answer yes to all of the questions, the gatekeeper flags up that they are probably in the wrong place.
IC: What do you think the regulators should be focusing on in their suitability drives?
DR: The key thing is making sure that questionnaires are constructed and expressed well, ensuring firms are challenging conflicting answers and making sure the client really understands what you mean by risk.
There must be an element of constructive challenge back to the client, which is something I do not see currently being provided by robo-advisers. Many seem to be passive recipients of data and the danger is that we end up with a two-tier market in terms of suitability that is unacknowledged.
I believe the regulator should segment its approach according to the level of interaction the client has with the firm giving the advice.
If I was being controversial I would say you should have one set of rules for those people who spend a substantial amount of time with the client and understand them, a second set of rules for remote completion of data and a third for self-determination or ‘robo’.
IC: So that speaks to firms defining early on what their service is and making it clear they are collecting data in that context.
DR: The firms that have done well are consistent in saying ‘This is what we do; and this is what we don’t do compared with other providers’. If you are the CEO or the senior manager you want to sleep at night, safe in the knowledge you are providing the service the board and investment committee want you to deliver to clients. It’s about living your marketing message.
‘You want to sleep at night, safe in the knowledge you
are delivering to clients.
It’s about living your marketing message’
IC: Clearly, we want to avoid a complete homogenisation of the industry as oversight tightens. How can firms stay within the lines but still deliver their investment philosophy and differentiate themselves?
DR: Again, it comes back to the context of the firm and client. We live in an increasingly multi-asset world as investors are turning to alternatives to meet their income needs. For instance, there is a real trend towards socially responsible investment at the moment.
All our clients use our tool differently. We want firms and investment managers to have the freedom to make their selections but provide them with a robust foundation for how portfolios are constructed and monitored for suitability on an ongoing basis.
Best practice is about consistency in how investment decisions are made and the documentation process, rather than the curtailment of choices managers and clients can make.
Survival of the fittest
Danny Knight, head of distribution at Old Mutual Wealth’s multi-asset team, explains why \advisers need to move with the times if they’re to thrive in today’s constantly evolving market
This year the financial services industry is facing a tidal wave of regulatory changes, mostly to improve transparency and customer outcomes.
The UAE’s insurance authority, the Emirates Securities and Commodities Authority, and its central bank, are both bringing in new regulation. In Europe, Priips and Mifid II have arrived. Next it’s the General Data Protection Regulation and Insurance Distribution Directive, then in 2019 it’s the Isle of Man Conduct of Business rules.
A similarly radical industry shake-up was experienced in the UK with the Retail Distribution Review in 2013. This illustrated to advisers that the key to the future prospects of their businesses lay in how they chose to adapt to the changes such regimes bring.
In future, advisers must ensure they have a clearly defined proposition statement, a clear service model and they must be confident in explaining to clients the ongoing benefits of the solutions they recommend.
In this context, the return of volatility to stock markets is something to be celebrated, not feared, as it allows advisers to demonstrate their real value.
For example, in 2017 the S&P 500 Index posted abnormally flat or positive returns in all 12 calendar months. Thanks to what’s known as ‘recency bias’, this has led some clients to expect continued gains at low levels of volatility.
To manage such unrealistic expectations, advisers need to educate clients to the variety of possible market scenarios and drivers.
For many clients, this process will
highlight how risk-targeted investing is
often the best approach.
Gaining an advantage
The key to outperforming using a risk-targeted approach rests on gaining an advantage in terms of information, analytics and execution.
For example, our Compass Portfolio range, available through Old Mutual International’s products, benefits from a sophisticated toolkit that’s been developed to deliver the optimal level of performance for a set level of risk, enabling us to help meet a client’s expectations over the whole of their investment journey.
Our expertise in the area of risk targeting was recognised by Defaqto earlier this year when it awarded us its 5 Diamond Risk-Targeted Fund Family Rating.
The rating reflects Defaqto’s evaluation of the range’s investment process, research capability, investment beliefs and philosophy, the combined experience of the investment team, and the strength and stability of the overall business.
We look forward to building on this success by ensuring our risk-targeted multi-asset solutions continue to help you deliver appropriate customer outcomes, even while you and your business adapt to today’s changing marketplace.
‘The key to outperforming using a risk-targeted approach rests on gaining
an advantage in terms
of information, analytics
Man and machine
Diversification is not the free lunch it used \to be and investing in multi-asset funds \requires more scrutiny than ever before. \But artificial intelligence is here to help
The merits of using multi-asset funds for client portfolios are well documented, but for advisers it is becoming harder to navigate the vast number of funds available and picking the right one(s) is not as straightforward as it once was.
Aside from the sheer number of funds, decisions need to be made as to which funds suits your client’s life stage, whether that is the run-up to retirement or in the decumulation phase. There is also the bigger question of whether the funds actually achieve their objectives.
This article covers why traditional multi-asset funds may not live up to investor expectations anymore and provides an alternative next-generation ‘all-rounder’ solution that moves away from historical investment theories and tactics to one that uses artificial intelligence (AI)*.
Portfolio construction overhaul
Historically, multi-asset funds have worked very well to reduce risk and diversify, and there is no doubt that what they are designed to achieve is ideal for the needs of most investors. However, they are no longer living up to expectations. Financial markets have entered a new era where traditional investment theories are proving not to be the reliable solutions they once were.
Traditional multi-asset funds rely too heavily on bonds as a risk management tool. Bonds have for many decades offered the counterbalance to equities, with decent returns when equities went down. However, bonds are coming off of a 35-year bull run and have, arguably, already entered what will be a long bear market. They will not be able to offer the protection they did in the past.
Multi-asset funds require assets that are lowly and ideally uncorrelated in order to provide the risk-reward pay-off they are designed to deliver.
The problem is that in a crisis, when you really need this theory to hold true, it doesn’t anymore. Most asset classes now typically correlate during times of market stress.
The table and chart above perfectly illustrate this point and go a step further to show that in the current bull market, equities and bonds are more correlated than ever.
Furthermore, crises like these often leave investors boxed in to theoretically lower risk-profiled multi-asset solutions, which lead to significant under-participation during equity bull markets, and bull markets last materially longer than bear markets.
The final problem for multi-asset funds is that they are on the whole managed by humans, and humans are predisposed to making emotional decisions driven by biases that can have serious negative effects on performance.
The S&P Dow Jones Spiva** report (31 Dec ’17) states that over a 15-year investment horizon, 92.33% of active large-cap managers underperformed their benchmark.
A break with tradition
To address the issues highlighted above takes a fundamental shift in the way investment solutions are constructed and managed. The Sanlam Managed Risk (SMR) Ucits Fund does exactly that.
The SMR Ucits Fund is a ‘nextgen all-rounder solution’, and covers the spectrum of client profiles as and when market environments demand. It is designed to provide shorter drawdown profile (capacity for loss) than a conservative approach, has a similar volatility profile (tolerance to risk) to moderate and a stronger total-return profile (outcome) than an aggressive approach.
The fund’s primary objective is to minimise capital-loss risk (not just volatility) while maximising equity participation over a market cycle. It offers an opportunity for investors to diversify their multi-asset manager risk.
‘Strategic diversification is no longer the ‘free lunch’ that so many have relied upon for the past 90 years’
Man and the machine
The chart on the next page shows the flexibility of the fund. These movements strengthen the message that intelligent dynamic asset allocation is the primary driver of return as well as risk in any portfolio. Strategic asset diversification is no longer the ‘free lunch’ that so many have relied upon for the past 90 years.
Few human managers of multi-asset funds have the ability, appetite or skill to change their equity exposure as significantly as the AI-driven SMR Ucits Fund can, an advantage of an AI-driven risk management process that runs without emotions.
Taking one’s ‘foot off the gas’ and then reversing the decision from one week to the next is a very difficult thing for humans to do. Instead, when an investment manager and artificial intelligence work together, these types of decisions become part of the quintessential modus operandi of an investment strategy.
It’s not man vs machines; it’s man with machines vs man without.
* The investment manager utilises an AI investment engine that drives the risk management strategy.
** S&P Indices Versus Active (Spiva) measures the performance of actively managed funds against their relevant S&P index benchmarks. Data to end Dec ’17 based on US equity market data and managers. Data set for the US market shown to illustrate the single largest equity region of a global equity investment.