Multi-asset investing

Multi asset strategies or funds invest in multiple asset classes, that primarily include equities, bonds, ?alternatives and cash. Investing in diverse asset classes is expected to generate better risk-adjusted returns across economic cycles, as compared to a traditional stock- bond portfolio. Their growth was driven by an enhanced need to protect the downside during economic slowdowns and a democratized access of additional asset classes. ?The investment vehicle is usually a mutual fund or a ‘SICAV’, that invests in own funds or those of others. They are a more evolved form of balanced funds and became popular after the global financial crisis in 2008.?The latest trends include offerings in climate change related multi asset opportunities, while some funds integrate climate and social risks into all investment analysis processes.

Equities can be selected by size (small cap, mid cap, large cap), style (value vs growth), or by geography (EMs vs DMs). Bonds can be selected by duration, credit profile, geographically or by currency (hard vs local). Alternatives include real estate, infrastructure, private equity, commodities, energy, hedge funds. The allocations to these vary depending on the objective, and products across different risk-return profiles are usually available.

?????????????????????Indicative list of roles various assets play in a portfolio

?The major investors include sovereign wealth funds, insurance companies, pension funds, endowment funds. Family offices and retail investors also invest in them, especially in developed economies. Sovereign wealth funds have huge funds to be invested globally and multi asset funds provide just the required extent of diversification across geographies and asset classes. Insurance companies have a need for ALM (asset liability management) for a longer horizon, and thus require higher exposure to fixed income. Pension funds have had a big switch to defined contribution plans and thus employers provide choices of multi asset funds for employees to invest in. Endowment funds are funds for not- for-profit institutions such as universities, and have a long term need for income generation and growth of capital.

Individuals planning for retirement can use target date funds, that come with a glide path. These funds change their asset allocation from equity heavy to a higher mix of debt as the target date approaches. Target risk funds can be chosen based on one’s risk appetite and offer aggressive or conservative allocations accordingly.

Approaches to asset allocation :

Dynamic asset allocation is done with a long term perspective of objectives of the end investor, using fundamental analysis.

Tactical asset allocation is done by adjusting weights of asset classes, in order take advantage of short term changes. This can be on the basis of short term economic changes or technical analysis to anticipate prices. The extent of deviation permissible is fixed and specified in advance.

Asset versus factor exposures

The traditional asset allocation begins with including assets and usually has a 60% equity – 40% bond allocation. Research has shown that this asset class diversification does not really lead to diversification of underlying risk or exposures to factors. A more modern approach involves identifying factor exposures first and choose a mix of asset classes accordingly.

Traditional approach to asset allocation overestimates diversification. Risk factor based approaches are widely used for alternative assets. Examples of factors include interest rates, inflation, growth, liquidity, home bias, value, momentum.

Why multi-asset strategies??Owing to a democratized access to several asset classes across geographies, multi-asset solutions are able to deliver several benefits to investors over a long term. These include :

a)?????Diversified exposure across asset classes makes for a better risk adjustment in the portfolio, by limiting the downside as compared to one asset class. It helps in improving the income potential in bearish markets, and growth potential in improving economic conditions. Such strategies aim at balancing both and maximize total returns.

b)?????Diversified exposure across geographies helps in capturing the best opportunities in income and growth, across different markets.

c)?????It is difficult to have an in-house expertise on all asset classes and geographies for a variety of investors. Multi-asset investing comes in handy with professional management on these.

Commodities like base metals, agriculture-based are expected to be a hedge against inflation. Copper and aluminium perform well when the economy starts to improve, in fact copper has ‘doctor’ as its moniker, as it usually provides a good gauge to the health of the economy.

Some precious metals like gold are considered to be safe haven investments and perform well during economic downturns.

Infrastructure investing forms a source of constant income and has arhigh correlation with inflation

Private equities provide an exposure like equities and contribute to enhance alpha. These are supposed to be long term investments.

Real estate exposures can be an income generator as well as provide capital appreciation, depending on the avenue used.

Possible risks involved include :

a)?????Risk by asset class

For instance, fixed income instruments may have interest rate risk, credit default risk, credit spread risk

b)?????Market risk

·????????Prices of different asset classes like equities, bonds, commodities could exhibit higher volatility that can affect returns

·????????Country risk arising due to political, economic factors that can affect the respective markets

c)?????Liquidity risk

Some emerging markets may have lower liquidity depending on the asset class, that may affect the prices for doing transactions.

d)?????Product related risk

·????????Mutual funds may be listed on the secondary markets for trading or not, and can affect liquidating or redemption of the shares accordingly

·????????Exposure to currency fluctuations according to share class

Lastly, investing in alternative asset classes via separate funds known as Alternative investment funds (AIFs) or combined in multi asset allocation funds is becoming increasingly popular in India. Here’s a good look into it’s growth story.

India: An Alternative Investment Industry Growth Story

https://caia.org/blog/2020/09/27/india-an-alternative-investment-industry-growth-story

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