James Mee of Waverton Investment Management writes that people say that diversification is the only free lunch in finance.
Therefore, it follows that increasing your investable universe ought to enable you to generate better risk-adjusted returns. A directly-invested multi-asset fund has some significant advantages to both a single asset class portfolio and a fund-of-funds approach to multi-asset investing.
Were you to put all your assets in a single asset class, say UK equities, then you are vulnerable to a few major influences, you have a concentrated set of risk factors. You can seek diversification in different sectors, in different sized companies, and so on, but you can only go so far. If you expand your universe to global equities, you can spread your risks much further, but all equites tend to be positively correlated to one degree or another.
By including bonds, commodities, property, and other alternative asset classes you are able to spread your risk as wide as possible. You can invest in more volatile, but potentially rewarding assets, because you have more stable components to compensate. In recent years bonds have tended to have a negative correlation with equities, meaning that they have been able to offer protection in times of equity drawdown. Meanwhile other asset classes often have negligible, near-zero correlations, offering a more stable footing for the fund.
With the world seemingly so uncertain at the moment, it seems that there are more arguments than ever for spreading investment risks across different geographies, asset classes and risk exposures.
But while the benefits of multi-asset investing might be apparent, not all multi-asset investing strategies are comparable. Were you to be convinced on the merits of diversification and go out and buy an equity fund, an alternatives fund and a bond fund in equal proportions, that is not the same as having one unified multi-asset strategy. If in the first year your equity, alternatives and bond funds grew by 9 per cent, 6 per cent and 3 per cent respectively, at the end of the first year you are no longer equally weighted, you are now comparatively overweight equities, and it is up to you to rebalance.
Meanwhile a true multi-asset fund can pragmatically and flexibly allocate between asset classes, rather than choosing arbitrarily, and will continually rebalance as appropriate. Not only is this more efficient for portfolio construction, but it means that you are not vulnerable to the ongoing transaction fees and frictions associated with the rebalancing.
Aside from diversification and greater control over the portfolio, a multi-asset fund manager is able to make cohesive decisions, rather than potentially disparate decisions (for example like those taken in a fund-of-funds approach). As an example of this, it may be that your hypothetical equity fund manager takes the view that she wishes to sell her mining shares, while at the same time the manager of your alternatives fund might be seeking to buy more commodities. This kind of inefficiency can be avoided by having one multi-asset fund.
Our multi-asset funds are global, active and direct. This style of investing gives us greater control over the assets that we own and a better idea of their attributes and exposures. Good ideas can be easily implemented and there are no extra fund fees to pay. Thanks to this direct approach, the Waverton multi-asset funds are also able to employ hedging instruments which can help mitigate volatile, uncertain markets.
The inhouse protection strategy seeks to buoy the funds at times of market stress. It is structured in such a way that it becomes increasingly rewarding as the market sell off becomes more pronounced. This sort of tailored solution would just not be repeatable in a fund-of-funds multi-asset approach.
Multi-asset funds seek to compound real returns through the cycle, and, in part, this is achieved by diversification across, not just a wide range of asset classes, but also across, regions, currencies, sectors and styles.
A good multi-asset fund – or suite of funds – should be constructed around putting risk first. At Waverton, we do not merely define risk as volatility, but take a more intuitive approach, with our goals being to outperform inflation over the long-term and prevent capital loss.
These goals inform everything that we do when investing and constructing our portfolios. Furthermore, with the long-term interests of investors’ capital and the fund in mind, where relevant, we endeavour to a pay a reasonable income, as opposed to a maximal one: seeking to avoid overextending ourselves as some other funds are liable to.
A multi-asset fund should be a true team effort, building on the proven skills of specialist equity, fixed income and alternative teams to provide the component parts of the fund.