In the current low-interest-rate environment investors seek returns adequate to meet their needs. This chase for yield leads more and more investors to invest in so-called multi-asset strategies, since these products promise to deliver returns from different asset classes in highly diversified portfolios. What is the rationale behind these products, and how can multi-asset strategies achieve their performance targets?
To learn more about the management of multi-asset portfolios Detlef Glow has spoken with Andreas J. Köster, Managing Director and Head of Asset Allocation & Currency at UBS Global Asset Management in Zurich.
Mister Köster, multi-asset strategies and in particular funds using these strategies have become a topic of interest for investors as well as for the media. Are multi-asset funds just a new name for mixed-asset funds, or do these strategies and products offer real advantages for investors?
From my point of view multi-asset products are not comparable with mixed-asset funds. These products may appear to follow a similar management approach, but a closer view shows there are huge differences between the two kinds of investment products. Mixed-asset products normally use a benchmark or an index to determine their asset allocation between bonds and equities; the portfolio manager can differ from this benchmark, depending on the flexibility of the investment approach and the portfolio guidelines. Opposite to this, multi-asset products normally do not follow any benchmark or index to determine their asset allocation.
The new popularity of multi-asset strategies results from their performance pattern during the different crises in the financial markets over the course of the last 15 years. These circumstances have led institutional investors especially to take a different view of the asset allocation of their portfolios, causing a "renaissance" of multi-asset strategies. The reason for this new thinking is the fact that broadly diversified portfolios such as the one from the Yale Foundation showed a high resistance against losses when the “tech bubble” burst in 2000 and over the subprime crisis of 2008. They have therefore shown much better risk-adjusted performance than have other products, including mixed-asset funds.
My personal definition of a multi-asset strategy is an unconstrained portfolio that is independent of a benchmark. In addition, the strategy should allow the portfolio manager to hold short positions, so the portfolio can profit from relapsing prices. This means the asset allocation of the portfolio is a result of active asset selection that is driven by the relative attractiveness of the different asset classes and the strategic as well as tactical views of the portfolio manager.
This level of freedom should enable the portfolio manager to create a highly diversified multi-asset portfolio that can deliver a unique risk-return profile to fulfill the needs of investors.
What exigencies by organizations and investors does a portfolio manager need to fulfill?
The management of multi-asset mandates has changed over the past few years. Since investment banks have increased their offerings of derivatives, a number of asset classes have become investable. At the same time the financial markets have become much more complex, leading to higher requirements for portfolio managers. In the past it was quite usual that a single manager had run a multi-asset strategy in addition to other portfolios. From my point of view those times are over, since at least large asset management companies that want to offer serious multi-asset products have started to hire highly specialized multi-asset teams. The team members are able to evaluate the relative attractiveness of single assets in terms of their risk-return profiles and to put them into a portfolio context.
In addition, the requirements of investors have increased over time. In the past investors expected the fund manager to be able to build a well-diversified portfolio to protect them for losses. Especially since the subprime crisis of 2008, investors now want the portfolio manager to act as risk manager, to reduce risk in the portfolio at the right time. This means the portfolio manager needs to follow an active buy-and-sell approach or to use derivatives to hedge portfolio holdings against market losses. In this regard it can be said that investors have adopted modern portfolio management techniques and have clearly changed their exigencies and expectations of portfolio managers.
You said that especially institutional investors use multi-asset strategies in their portfolios. Are these investors buying mutual funds, or do they use different vehicles to implement these strategies?
As multi-asset strategies have become popular during the current low-interest-rate environment, it is not surprising that the demand for these kinds of products has increased over the last couple of years. Even though it is not unusual that institutional investors buy mutual funds, they normally prefer segregated accounts for which they can define the guidelines and specifications of the mandate in detail. Since institutional investors do not want to be dependent on a single manager, they try to achieve a diversification in terms of management approaches by combining different asset managers.
In addition, we realize that more and more institutional investors have started to transfer knowledge about multi-asset strategies into their own asset management teams during asset allocation committee meetings or other meetings.
Another trend we have observed is a trend to advisory mandates. This means investors hire a multi-asset specialist to guide the portfolio manager as a navigator or “copilot” through the different asset classes and market conditions. The advisor himself no longer has responsibility for the allocations and the performance, since all the decisions are made and executed by the investor.
Which type of investor should buy multi-asset products?
Multi-asset strategies are in general eligible for all kinds of investors. But investors need to bear in mind that multi-asset strategies, even though they offer broadly diversified portfolios, do carry the risk of loss. In this regard any investor who wants to buy into a multi-asset strategy should be able to bear the specific risks of the strategy. In addition, it needs to be said that multi-asset strategies might need a full economic cycle to deliver the expected risk-return profile. This means investors need to have a rather long-term investment horizon if they want to invest in multi-asset strategies.
To serve all the needs of the different types of clients, UBS Global Asset Management offers a wide range of services—such as consulting mandates—and products—such as mutual funds with different risk-return profiles.
Thank you for this interview!