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Multi-asset edge

The ability to invest beyond stocks and bonds gives added diversification benefits and enables multi-asset funds to preserve value in rocky markets


THE multi-asset segment of funds, positioned as a staple in portfolios, has seen a surge in inflows since the 2008 crisis from both institutional and retail investors - and not without reason.

Its ability to invest across a range of assets beyond stocks and bonds, and including commodities and real estate, gives it added diversification benefits, which enables it to preserve value in rocky markets. This is evident in recent weeks. Based on Morningstar Direct data, multi-asset funds registered for sale in Singapore delivered a median return of minus 5 per cent for the month of October, a welcome outcome compared to minus 7 per cent by MSCI World Index. Some funds did even better with losses between 2 and 3 per cent.

Multi-asset funds are typically also designed with a well-defined "outcome orientation". This means that rather than measure themselves against a notional benchmark, investors have the comfort of a specific target - low volatility, for instance, or a target return such as Libor plus, or an income target.

Income funds, in particular, have found a receptive audience. Fidelity, for instance, says its multi-asset team manages some US$43.9 billion in assets as at end-September. Its income strategy has grown from US$4.8 billion in 2016 to roughly US$10 billion. JP Morgan Asset Management's multi-asset solutions group has seen an even more impressive inflow of US$104 billion between end-2015 and Q3 2018.

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Its income strategies attracted strong flows of US$17 billion globally. It adds that the fastest growth, however, has been in unconstrained total return investing, where it saw 63 per cent growth in macro-thematic strategies.

These are strategies where portfolios are managed to a cash benchmark and built using macro-themes. "As such, we believe the focus has not shifted to multi-asset per se, but rather to outcomes - such as a regular, consistent level of income or total return through varying market environments. Many of the solutions to these client issues are multi-asset in nature."

George Efstathopoulos, Fidelity International multi-asset portfolio manager, says multi-asset funds help to address gaps in traditional balanced funds, which offer simply combinations of stocks and bonds. "Traditional 'balanced' approaches ... and the benchmarks underpinning them, contain many pitfalls. A more dynamic approach that is truly multi-asset offers the ability to invest in new markets, especially as domestic markets fail to offer the returns clients desire."

Here is a round-up of how multi-asset funds are being positioned for 2019:

Fidelity International's George Efstathopoulos: "As we head into a new year that is likely characterised by low return, higher volume environment, alpha will be a key source of returns, with broad market exposure unlikely to persist as a source of attractive returns. We will continue to be positioned defensively using the full toolkit of hedges we have available across equities, fixed income and currencies. Exposure to defensive assets such as US investment grade bonds and Chinese government bonds will play an increasing role."

Goldman Sachs Asset Management head of global portfolio solutions group (EMEA and Asia Pacific) Shoqat Bunglawala: "We're positive on stocks and believe the risk-reward has improved following the recent (October) sell-off. Over the medium term, returns should be supported by the continued economic expansion, earnings growth and valuations which we judge to be on the cheap side relative to current macro-conditions. EM remains our preferred segment of equity markets.

UBS Asset Management head of macro asset allocation strategy Evan Brown: "On US equities, stronger than expected corporate earnings growth, rising M&A, improving manufacturing activity and increasing capital returns to shareholders are likely to remain key supports in the coming months. On China equities, any broadening of the current trade standoff with the US is likely to hamper Chinese growth, but a gradual economic slowdown is already priced in, and the Chinese authorities have shown themselves willing to provide monetary, fiscal and regulatory support to help smooth the ongoing economic transition. Chinese bonds have delivered the highest nominal yields among the 10 largest fixed income markets, yet have delivered the strongest risk-adjusted returns over both five and 10 years."

JP Morgan Asset Management international chief investment officer (multi-asset solutions) James Elliot: "In our asset allocation discussions we have become incrementally less positive on equity and recently upgraded our view on US dollar cash. In November, we removed our small equity overweight by reducing conviction in Europe and EM. Europe remains one of our least favoured equities regions amid unfavourable earnings revisions, market technical factors and political uncertainty, while the slowing growth and rising US rate backdrop continue to be negatives for EM."

Franklin Templeton Multi-Asset Solutions portfolio manager Ricky Chau: "In equities we prefer US, Canada and Japan over Europe, Pacific ex- Japan and EM. In fixed income, we prefer non-US dollar government bonds over US Treasuries and high yield over investment grade and EM bonds. Looking head to 2019 the themes we expect to play out include decelerating growth, rising inflation and unorthodox politics. Ongoing developments such as the US-China trade relations and Brexit implications would cause continued divergence in the global trade dynamics from historic norms. Hence, investors would require a careful positioning in asset allocation." W