Long-term strategic investing threatened by multi-asset

The traditional method of setting a strategic asset allocation several years ahead is being challenged in an environment where investors are having to deal with low returns and market uncertainty.
Long-term strategic investing threatened by multi-asset

Short-term thinking and a need to jump in and out of markets more easily are key drivers of Asian investors’ move towards multi-asset investing, say market experts.

The traditional method of setting a strategic asset allocation several years ahead is being challenged in an environment where investors are having to deal, as rarely before, with low returns and market uncertainty.

“Clearly we’ve had a lot of volatility in markets and in that situation, it becomes difficult for investors to adequately manage their risk,” said Andrew Harmstone, managing director and portfolio manager of global multi-asset at Morgan Stanley Investment Management.

The idea of setting a strategic allocation and leaving it for five to 10 years is being challenged by this new orthodoxy. “This has been the stumbling block for investors,” Harmstone said. “The problem is that no one really has a 10-year investment horizon anymore, in my view.”

Being able to adjust positions more quickly, especially when conditions improve, is a consistent demand from clients, he said. Which is just as well for multi-asset investors because, as Harmstone said, “you have to be prepared to change your asset allocation a great deal.”

Investor appetite for multi-asset tends to be greatest among investors who don’t have the ability to put a risk-managed portfolio together in a systematic way, he said. The mistake many investors make is not addressing risk at the outset. "What I think happens," said Harmstone, "is that portfolios are constructed and then risk is evaluated. We begin with a risk level that is integral to the whole process, which helps to sharpen the volatility of the portfolio."

What is interesting, said Harmstone, “is that we are starting to see banks and insurance companies using multi-asset to gain risk-managed exposures.”

Regional demand for multi-asset is coming from three key areas, he said - Japan, Greater China and Australia/New Zealand: “And in terms of new business flows, it is private wealth networks in Hong Kong and Singapore.”

Manulife Asset Management has also observed that insurers and pension managers have found traditional balanced portfolios were no longer able to meet their investment needs. “This has led an increasing number of institutional investors to set their sights on non-static asset allocation solutions,” Manulife noted.

Harmstone added: “Even the larger institutions, who have traditionally used strategic allocation, are finding that approach is not nimble enough. The global financial crisis showed how even a well-constructed portfolio will perform badly in absolute terms. This led to institutions managing their portfolios more flexibly.”


Capital protection, using options and stop losses, are other methods of managing downside risk. But Harmstone said, “Options take away a lot of the upside and stop losses are inherently backward-looking. They create an investment position that could mean the investor is de-risking at precisely the wrong moment."

Making ad hoc changes to your portfolio isn’t the solution either, he said: “Wouldn’t it be better to put in place a process that systematically varies the risk, and do it in a way that allows you to be comfortable at all times with the level of risk? A risk-based strategy also means being able to get back into the market.”

For Asian clients, Harmstone said their concerns were typically around implementation: “In any region you will have home bias, so in offering global diversity, we have to match the local currency and asset mix requirements.”

According to Manulife, the diversification theme of multi-asset investing also plays out at the currency level, “as Asia [ex-Japan] is comprised of about a dozen heterogeneous bond markets, each with its own currency and monetary and fiscal policy. This adds to the diversity of investment opportunities in the region by raising the potential to boost investment returns via gains on currency appreciation.”

Singapore-based Aman Dhingra, head of fund solutions at Coutts, told AsianInvestor that clients who take up multi-asset investing are often those who were not inclined to invest via mandates or do not meet the minimum investment criteria to do so. “They usually use multi-asset funds as their investment to generate steady returns for the long term; and use thematic funds as their satellite investment to generate alpha,” he said.

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