As investors shift focus from individual products to investment solutions, the demand for multi-asset investing is growing. According to Priscilla Luk, managing director and head of Asia Pacific, global research & design S&P Dow Jones Indices (S&P DJI), amid current market uncertainties and rising US interest rates, multi-asset investment solutions are an effective option to diversify portfolio risks and achieve stable returns.
Luk says a multi-index strategy is one way these investors can find growth, since a diversified multi-asset approach can potentially push the boundaries of index investing beyond asset class beta and systemic risk premia. For institutions moving from traditionally active, to passive management, it also delivers curated solutions that meet increasing demand for pre-packaged multi-asset investment products.
“Index solutions are evolving. We here at S&P Dow Jones Indices are providing different types of indices as portfolio building blocks from which investors can build or customise investment portfolios for differing investment objectives. For example, our retirement solution, S&P Target Date Indices takes into account the differing years until retirement and this is reflected in varying allocations among equities, fixed income and commodities,” Luk says. In constructing its multi-asset indices, S&P DJI utilises indices across asset classses to develop three major indexing solutions - risk management, high income and retirement solutions.
MANAGING RISK - DIVERSIFICATION
Diversification helps smooth out return volatility and limits risk. The traditional recipe for asset allocation is a 60:40 equity to bond portfolio where risk is dominated by equities. In a timely step, the recently launched S&P Risk Parity Indices is aimed specifically at risk diversification. The indices serve as a benchmark for risk parity portfolios and provide an alternative for investors seeking passive investable solutions. It focuses on balancing risk contribution across asset classes to achieve higher returns and reduce risk over the long term. Since risk and returns are inversely proportional, risk parity indices tend to outperform the 60:40 portfolio during economic slowdowns and contractions, but underperform in expansion and recovery cycles.
To ensure replicability and investibility, the S&P Risk Parity Indices uses liquid futures contracts on a mix of equities, fixed income (e.g. US Treasuries) and commodities (e.g. gas, oil, corn). For stable asset class allocations against shorter-term market movements, risk is measured by a 15-year look-back period of realised volatility in the index.
An added benefit of risk parity strategies is as a hedge against inflation. S&P DJI’s statistics show that over a 14-year timeframe, S&P Risk Parity Indices with 10%, 12%, and 15% target volatility outperformed a 60:40 portfolio by a monthly average of 45 basis points (bps), 39 bps, and 31 bps, respectively in high-inflation months.
Another S&P DJI multi-asset solution, the S&P Multi-Asset Income Trend-Following Index is designed for institutional investors seeking high yield. Its less conservative approach uses a mixture of equities plus fixed income to achieve high income with diversity spread across US, Europe and Asia.
“I like the S&P Multi-Asset Income Trend-Following Index a lot,” Luk says. “We’re still seeing clients and market participants who want a high-income portfolio. But some of them prefer more diversification across asset classes, rather than a high concentration in high yield stocks. This index adopts a trend-follow strategy in allocating weights to different high income asset classes which focus more on enhancing return than volatility reduction,” says Luk.
The constant evolution of the global asset management industry in response to economic and institutional demands has blurred the lines between active, passive and alternative managers. From Luk’s point of view, index-based solutions, supported by deep analysis will become increasingly important for institutional investors seeking returns, better portfolio diversification and cost effectiveness.
More information about S&P Dow Jones Indices Multi-Asset index solutions is available here
It is not possible to invest directly in an index. Exposure to an asset class represented by an index may be available through investable instruments based on that index. S&P Dow Jones Indices does not sponsor, endorse, sell, promote or manage any investment fund or other investment vehicle that is offered by third parties ant that seeks to provide an investment return based on the performance of any index. S&P Dow Jones Indices makes no assurance that investment products based on the index will accurately track index performance or provide positive investment returns. S&P Dow Jones Indices LLC is not an investment advisor, and S&P Dow Jones Indices make no representation regarding the advisability of investing in any such investment fund or other investment vehicle.