There are two ways to create a multi-asset portfolio: pay someone to provide one for you or create your own by blending together your own selection of funds. In our view, multi-asset investing is a specialist discipline that requires both depth and breadth of investment knowledge. Here are five reasons why outsourcing multi-asset investing makes investment and business sense.
1. Finding asset classes that have low correlation with one another and attractive return prospects is hard
A common goal of multi-asset investing is to find asset classes with good returns and low correlation with one another so that the portfolio return profile is relatively smooth. But that’s actually surprisingly hard to do. Even the most common tactic for portfolio diversification – blending equities and bonds – is not as effective as it once was, as the prospective returns for government bonds are now very low. So investors need to consider new diversification strategies and this, in our view, takes specialist expertise.
2. Specialist asset knowledge is essential
Given the ultra-low interest rate environment, investors need to look beyond traditional equities and bonds to non-traditional assets classes to provide a meaningful return as well as risk diversification. Property, infrastructure and emerging market bonds may all need to be included in the mix, along with increasingly popular alternative asset classes, such as peer-to-peer lending, which enables investors to lend money to individuals or businesses. But how many advisors can feel truly confident appraising and tracking so many different asset classes that each behave differently at various stages of the economic cycle?
Of course, you could blend funds that individually focus on different asset classes. But the field of funds offering exposure to highly specialist asset classes is small. Plus, this still requires skillful asset allocation to ensure diversification enhances risk-adjusted return and doesn’t simply dilute overall returns. Blending individual funds will also involve a double layer of time and costs – the fund managers’ and yours.
3. Multi-asset management requires a lot of support
Being truly multi-asset can require following as many as 15 different asset classes spanning global markets. To do that well not only takes a lot of time and expertise, but also the funds to meet minimum transaction sizes, knowledge of the optimal instruments to implement each position and the ability to get into private and other less accessible markets.
Being truly multi-asset can require following as many as 15 different asset classes spanning global markets.
It’s no coincidence that the firms that tend to lead the way in offering multi-asset solutions are those major asset managers that are able to draw on dedicated expertise in each asset class then assimilate this into a centralized multi-asset capability. Trying to manage multi-asset portfolios without this underlying infrastructure is hard and challenging to do cost-effectively.
4. Outsourcing leaves firms free to focus on their clients
Blending asset classes effectively is a worthwhile skill. But for advisors, it may rarely be the prime reason clients are paying an ongoing advice charge. It may be better to free up time to spend on the tasks that add the most demonstrable value to clients cannot easily be outsourced, such as drawing up a financial plan to help clients reach their goals, reviewing their ongoing progress or reacting to a specific financial event in their lives.
5. You can choose the best multi-asset manager for the job
Managers look to achieve returns from multi-asset investing in many different ways: there are the hedge funds that look to take multiple positions across a wide variety of different investment strategies; the market timers that rely on their ability to switch between asset classes to generate alpha. Or there are the managers who simply focus on building highly-diversified, buy-and-hold portfolios to achieve long-term absolute returns.
The risk-return profile, not to mention the level of transparency and trading costs, can vary enormously across these different approaches. By outsourcing, you can select the approach that best suits your clients and your own judgment – or indeed blend them. The more flexible you can be regarding who provides your multi-asset expertise, the more ready you can be to navigate market conditions – whatever the future holds.
Diversification does not ensure a profit or protect against a loss in a declining market.
Alternative investments involve specific risks that may be greater than those associated with traditional investments; are not suitable for all clients; and intended for experienced and sophisticated investors who meet specific suitability requirements and are willing to bear the high economic risks of the investment. Investments of this type may engage in speculative investment practices; carry additional risk of loss, including possibility of partial or total loss of invested capital, due to the nature and volatility of the underlying investments; and are generally considered to be illiquid due to restrictive repurchase procedures. These investments may also involve different regulatory and reporting requirements, complex tax structures, and delays in distributing important tax information.
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