Blending multi-asset solutions

27 May 2022

Wayne Nutland
Premier Miton multi manager funds

Multi-asset investment funds are often regarded as one stop shops, offering a holistic investment solution for clients suited to their risk profile. However multi-asset solutions will often embed longer-term structural design features and it can make sense to diversify these strategic approaches, particularly for clients with larger portfolios. Although we could consider diversifying multi-asset solutions with different risk profiles, e.g. combining low and high risk funds to deliver a medium risk fund, for the purpose of this article we’ll focus on blending funds with similar risk profiles.

The same risk profile can deliver very different outcomes

Let’s look at a typical risk profile, say balanced, or a volatility target of 8%. There are numerous ways of building an asset allocation which fits a risk target. An 8% volatility target could be achieved via a 40:40:20 allocation to short dated gilts, UK equities and commodities or alternatively via a 40:40:20 allocation to global government bonds (GBP hedged), North American equities and emerging market local currency bonds.

Over the 10 years to end March 2022 these two portfolios would have performed very differently despite having similar volatility profiles, with almost a 70 percentage point difference in cumulative total return. Whilst these are extreme examples, they demonstrate that portfolios with similar volatility targets can deliver very different return profiles at different times. These examples focus solely on how asset class level returns, stock or fund selection could narrow the gap or widen it further.

What drives differences in asset allocation and fund selection?

Multi-asset funds could be built to the same risk profile but deliver very different positioning and performance outcomes for many reasons. Both of the simple portfolios above use correlation and volatility assumptions, but the assumptions used may turn out to be broadly correct for one portfolio but incorrect for the other. Another way of thinking about this concept is in terms of macro-economic regimes. With debates over inflation and interest rates raging at present, it could be the case that different solutions are built with different big picture macroeconomic regimes in mind, e.g. one fund may assume that the existing macro-economic regime is broadly persistent, whilst another may be positioned for a significant change in the macro regime.

Whilst big picture considerations like these tend to capture attention, often it’s the more mundane aspects of portfolio construction which drive important differences in portfolio positioning. These may be embedded in a firm’s investment philosophy via strategic asset allocation, or approach to fund selection, or may reflect other aspects of the portfolio construction process such as the size of tactical positions taken. For example, are there criteria to include or exclude asset classes, are alternatives included, does global equity exposure reflect market cap weightings, are currency exposures typically hedged or unhedged, is bond duration managed independently of asset allocation, is there a persistent style bias within equity, does equity selection include thematic or ESG approaches which may reflect client interests? Often these longer term structural features can have a major impact on the performance profile of the multi-asset solution, even where tactical position are taken.

Diversify across strategic approaches

Deciding which macro-economic regime is likely to dominate the next investment cycle or which approach to strategic portfolio construction will be most successful in the future is very difficult. Whilst multi-asset funds are usually highly diversified at the security level, different approaches taken to strategic questions can lead to more focused exposures at the factor level. By understanding the approaches taken, advisors may be able to ascertain which economic and market conditions may be relatively more or less favourable to different multi-asset solutions.

It makes sense when looking at a client’s holistic portfolio to select funds which offer multiple sources of return and offer some diversification across the types of strategic questions posed above. Different solutions will have different answers to these questions and the answers are not right or wrong; approaches differ and what is correct for one solution may not be suitable for another. But as we have seen, the different approaches can lead to very different performance profiles even where similar levels of risk are taken.

Consequently diversifying across multi-asset solutions which take different approaches to these strategic questions can make sense, especially for clients with large portfolios or without complete certainly over investment horizon, e.g. if a client needs to make an unforeseen withdrawal in 5 years, holding complementary multi-asset solutions could prevent selling one approach when out of favour.

More broadly, holding complementary multi-asset solutions which take different approaches to strategic portfolio construction may lead to a smoother performance journey for clients, whilst differing approaches may also cover a greater number of issues on which advisors can engage clients to deepen their understanding of client needs and increase clients’ familiarity with their investments.

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Risks

The value of stock market investments will fluctuate, and investors may not get back the original amount invested.

The performance information presented in this insight note is for illustrative purposes only and  relates to the past. Past performance is not a reliable indicator of future returns.

Equities (shares) can experience high levels of price fluctuation.

Changes in central bank interest rates can affect all types of assets, in particular, securities such as government bonds and corporate bonds that generally offer a fixed level of interest. If interest rates go up, the value of a bond may fall, and vice versa.

IMPORTANT INFORMATION:

For Investment Professionals only. No other persons should rely on any information contained in this document.

Whilst every effort has been made to ensure the accuracy of the information contained within this document, we regret that we cannot accept responsibility for any omissions or errors. The information given and opinions expressed are subject to change and should not be interpreted as investment advice.

All data is sourced to Premier Miton unless otherwise stated. Persons who do not have professional experience in matters relating to investments should not rely on the content of this document.

For your protection, calls may be monitored and recorded for training and quality assurance purposes.

Issued by Premier Miton Investors. Premier Portfolio Managers Limited is registered in England no. 01235867. Premier Fund Managers Limited is registered in England no. 02274227.  Both companies are authorised and regulated by the Financial Conduct Authority and are members of the ‘Premier Miton Investors’ marketing group and subsidiaries of Premier Miton Group plc (registered in England no. 06306664). Registered office: Eastgate Court, High Street, Guildford, Surrey GU1 3DE.

006717/270522

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This section of the website and the content it contains is for retail clients only and by persons who are resident in the United Kingdom [who are not US persons]. Professional advisers should refer to the Professional Advisers site.

The content of the pages of this website is for your general information only. It, and the products and services described within it, are subject to change without notice. We shall not be liable to you, or any third party, for any amendment, modification, suspension or discontinuance of any product or service described on our website. Neither we, nor any third parties, provide any warranty or guarantee as to the accuracy, timeliness, performance, completeness or appropriateness of the information and materials made available on this website.

You acknowledge that such information may contain inaccuracies or errors and we expressly exclude liability for any such inaccuracies or errors to the fullest extent permitted by law. Your use of any information or materials is entirely at your own risk, for which we shall not be liable.

The information contained on this website does not constitute an offer or solicitation to sell or purchase shares in the funds or portfolios or to provide you with other products or services. Any application or investment must only be made on the basis of the relevant documentation of the investment, such as, for example, terms and conditions. The information on this website does not constitute any investment, tax, legal or other advice. Persons who do not have professional experience in matters relating to investments should always consult with an independent financial adviser before making an investment decision. Any opinion expressed on individual funds, services or products represent the views of the individual at the time of preparation and should not be interpreted as a personal recommendation to buy or sell or otherwise trade all or any of the investments that may be referred to.

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The content of the pages of this website is for your general information and use only. It, and the products and services described within it, are subject to change without notice. We shall not be liable to you, or any third party, for any amendment, modification, suspension or discontinuance of any product or service described on our website. Neither we, nor any third parties, provide any warranty or guarantee as to the accuracy, timeliness, performance, completeness or appropriateness of the information and materials made available on this website.

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