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FRANKLIN TEMPLETON SOLUTIONS

PREPARED FOR WHAT’S NEXT You can’t predict what will happen next – but you can be prepared. That’s why we offer multi-asset solutions that respond to uncertainty with the con� dence that comes from a laser focus on clients’ intended outcomes, active risk management, and the openness to integrate innovative and diversifying return sources. Let us help you prepare for what’s next.

Find out more at ftinstitutional.com

This piece is intended for institutional investment management consultants or investors interested in institutional products and services available through Franklin Templeton Institutional and its af� liates. Various account minimums or other eligibility quali� cations apply depending on the investment strategy or vehicle.© 2016 Franklin Templeton Investments. All rights reserved.

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SPONSORDIRECTORY CONTENTS

4Looking for opportunity

in a return-starved world

6How to get clients,

managers on the same page

8The right stuff

10Defining dynamic management

12How best to manage beta risk?

Potholes should be small and shallow

14Choosing the right benchmark

JUNE 2016

VISITwww.pionline.com/multiasset

for exclusive featured content, white papers and information about our webinar.Franklin Templeton Investments

300 Atlantic Street, 12th FloorStamford, CT 06901Lynn HaffnerManaging Director, Head of Investment Solutions-AmericaFranklin Templeton Solutions(203) 504-1433Lynn.Haffner@franklintempleton.comwww.ftinstitutional.com

Janus Capital Institutional151 Detroit StreetDenver, CO 80206Susan OhSVP, Head of Institutional Americas(303) [email protected]

J.P. Morgan Asset Management270 Park Ave.New York, NY 10017Joe SteccatoManaging DirectorHead of Defined Benefit – Institutional Americas(212) [email protected]://am.jpmorgan.com/institutional/home

PineBridge Investments399 Park Avenue, 4th floorNew York, NY 10022Sergio RamirezManaging DirectorHead of Business Development, Americas(646) [email protected]

Russell Investments1301 Second AvenueSeattle, WA 98101Eric Macy, CFAManaging Director, Fiduciary Solutions(855) [email protected]/multiasset

Multi-Asset_Layout 1 6/6/16 9:56 AM Page 2

4 | MULTI-ASSET INVESTING | ADVERTISING SUPPLEMENT

LOOKINGfor opportunity in a return-starved worldLOOKING

om Nelson sees investment opportunities popping up weeklyand monthly. What he doesn’t see, however, is the catalystfor the next big correction.

“No crystal ball can tell us what will be the next step forany given asset class,” said Nelson, senior vice presidentand director of investment solutions at Franklin TempletonSolutions. “The key is making sure that we have a robustprocess that uses lots of resources and inputs, that we’rethoughtful and disciplined long-term investors with an abil-ity to take opportunities as they present themselves.”

Where does he see opportunity right now? For equities,in Europe.

“We believe European equities offer better value com-pared to the United States, which has done very well overthe last few years,” he said. “U.S. equity valuations are onthe rich side, especially in light of the fact that now we maybe moving into a slower growth, Fed-tightening- type of cyclewhere earnings just kind of muddle through.”

There are plenty of reasons why Europe can outperformthe U.S. over the next 12 to 24 months, according to BrianMeath, chief investment officer for multi-asset solutions atRussell Investments.

“Whether it’s because European governments are nolonger in contractionary mode or the benefit of a lower eurofor exports, earnings expectations in Europe are not comingdown as fast as they are in the U.S.,” he said. “European val-uations are just more supportive.”

Ash Alankar, global head of asset allocation and riskmanagement for Janus Capital Group, agreed. “Some ralliesare sustainable, others not so much,” he said. “In the U.S.,for example, the options market indicates that investors aremoving toward equities more as a yield play than a growthplay. And while it may drive an equity rally, equities shouldnot be priced on yield, and we believe that such a rally is nei-

ther stable nor resilient. So our view is that the rally in U.S.equities might be fleeting.”

Nelson said he believes emerging markets may be onthe verge of a rebound. “The China slowdown does not ap-pear to be as bad as initially feared, and that could be a tail-wind for the broader EM Asia region,” he said.

“While we have had an underweight to emerging mar-kets, we have been upgrading that view,” added Jeff Geller,chief investment officer for multi-asset solutions for the Amer-icas at JPMorgan Asset Management. “The signals we look atare now probably more neutral with respect to developed vs.emerging when you look at valuation and fundamentals. Weare also seeing more stability in emerging market currencyand commodities. Given where valuations are, even thoughthe fundamental outlook still remains negative, we have mod-erated that negative view, and it’s appropriate to not have suchan extreme underweight in portfolios.”

Credit tops equityGeller said he prefers credit over equity on a total return

and risk-adjusted basis.“While we remain constructive on risk assets and are

not forecasting a recession in the next 12 to 18 months, wehave ratcheted down our expectations for global growth,” heexplained. “And if you think the world is going to be in alower-growth environment, that implies earnings expecta-tions are coming down, suggesting more muted equity re-turns, which is driving our preference for credit.

“The other thing to look at is duration, recognizing that inthe environment we’re in today, Treasuries are likely to con-tinue to be negatively correlated vs. risk assets,” he added. “Sowe have seen duration play a very important role in multi-assetclass portfolios to diversify and mitigate the volatility from riskassets, whether those are equities or extended credit.”

European equities offer better value than U.S. equities but credit might beat them all

T



On the fixed-income side, Nelson of Franklin Templetonsaid investors currently are being compensated with decentspreads in both high-yield and investment-grade credit. “Al-though we don’t like developed government bonds, generallywe do like TIPS,” he said. “We feel that inflation is currentlymispriced, which points to an opportunity in U.S. TIPS.”

Janus Capital’s Alankar said that the options market issending positive signals regarding inflation-sensitive assets.

“One of our strongest views for 2016 is an inflation sur-prise,” he explained. “The downward disinflationary envi-ronment we’ve been in for the past several years is startingto stabilize. We’re seeing stability in commodity prices, pre-cious metals, the energy sector and the agricultural sector —all of which can contribute to a rise in headline inflation.

“Inflation-protected notes are a much better place topark money than nominal bonds,” he explained, “and in-vestors may want to consider holding more real-rate durationvs. nominal duration, as well as adding to exposures acrossthe spectrum of commodities, in particular the energy andagriculture sectors.”

Meath of Russell Investments sees opportunity in highyield, where spreads widened out in mid-February past 800basis points.

“We thought that was overdone,” he said. “As long asthe U.S. economy remains stable, with at least some growth,by and large corporations will still be able to pay their debt.”

He added, however, that high yield at 850-basis-pointspreads is an attractive investment over the medium term.“This isn’t necessarily a longer-term view,” he said. “Eventuallythis economic cycle is going to end, and holding too much inhigh-yield bonds isn't going to be a very comfortable position.”

U.S. hits a midcycle pauseMichael J. Kelly, managing director and global head of

multi-asset at PineBridge Investments, said prior to the globalfinancial crisis, investors focused too much on returns, butsince then have been overly preoccupied with risk aversion.

“The recent over-focus on risk has been easy to get awaywith because there has been no return penalty for increas-ing the mix of low-risk factors, as they have enjoyed a longtailwind,” he said. “But we believe the biggest risk ahead is aperiod of low nominal returns across most asset classes, inparticular the low-risk asset classes and low-risk factors,which now face long-term headwinds.”

He counsels clients that managing strictly to risk, asmany have done over the past several years without penalty,may result in very low returns, as returns in most assetclasses will be more challenging.

“Moreover, we believe that investors’ risk posture — notonly for multi-asset investors, but for every large asset owner— should evolve with the business cycle,” he added. “Aroundthe end of last year and beginning of this year, markets beganhaving end-of-cycle-itis, if you will, anticipating a downturnand shifting their portfolios accordingly. But after a period ofsurprisingly low growth and constant, grinding deleveraging,we believe that developed markets will surprise with strongergrowth over the next several years. So we believe that at leastin developed economies, people should be thinking more interms of a midcycle pause, followed by several years wherethey can earn reasonable capital appreciation.”

Within that model, Kelly said his team looks for secularupgraders such as Japan and Europe in developed markets.He even sees isolated opportunities among emergingeconomies such as India and Mexico. He added that he looksfor strong security selectors in favored markets and assetclasses.

“Take high yield as an example, where credit defaultswill rise as the business cycle matures,” he explained. “Man-agers need to find good credit-based security selections thatcan continue to add value even as the asset class is weigheddown by rising defaults and falling recoveries. Good securityselectors, no matter what the asset class, will have a muchgreater ability to add alpha.” •

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Flows to multi-strategy funds

Source: Morningstar Inc.Note: Flows to Tactical Allocation funds as defined by Morningsar. To qualify for the tactical allocation category, the fund must have minimum exposures of 10% in bondsand 20% in equity and must historically demonstrate material shifts in sector or regional allocations. * Through April 30

'Eventually this economiccycle is going to end, andholding too much in high-

yield bonds isn't going to be avery comfortable position.'

Brian Meath, CIO of multi-asset solutions Russell Investments



ulti-asset managers usually have a strategic framework inwhich they build their asset allocation views, but often howthey express those market and asset class views dependson the client’s objective.

“From that standpoint, our philosophy is about deliver-ing what the client is looking for rather than pushing productto fill a generic need,” said Greg Gilbert, CEO of the Americasinstitutional business at Russell Investments. “To achievethat objective, we start with the clients’ outcome in mind,maximizing sources of diversification, globalization, andthinking beyond traditional asset classes — that is, silos ofequities and bonds. We need to think of things that might fallin between those silos and manage this diverse set of expo-sures as a single pool of assets.”

He cited a comprehensive set of diversifiers that includedifferent asset classes as well as active vs. passive strate-gies, currencies, options strategies, factors and styles.

“Indeed, multi-asset strategists need a deep toolkit inorder to construct precise exposures aimed at increasing re-turn and reducing risk,” Gilbert said.

The toolkit, which needs to operate on an intraday basis,requires a real-time, comprehensive view into the underlyingsecurities and the ability to act immediately via a compre-hensive trading capability, he explained.

What’s the problem?“It’s very important that we get grounded by under-

standing the investment problem we’re solving for,” said JeffGeller, chief investment officer for multi-asset solutions forthe Americas at JPMorgan Asset Management. “That is, howis the client defining success, and what bandwidth are weoperating with?”

According to Geller, some clients may be looking formulti-asset managers to implement their asset allocationviews in a measured way, relative to a strategic or policy port-folio, while others give the manager discretion to operate withgreater flexibility. In many instances, clients have views oncertain asset classes (e.g., traditional vs. alternatives), or liq-uidity requirements, or funding objectives, all of which willimpact how Geller and other multi-asset managers may uti-lize their broader investment platforms.

“In the case of pension clients, they may come to us andsay they’re looking over the next five to seven years to im-prove funded status,” Geller said. “Yet they’re sensitive tofunded status deteriorating. We work with the client to bal-ance these somewhat conflicting goals.”

“In the multi-asset space, it’s important for institu-tions to align themselves with an investment manage-ment group or fund that has the same kind ofphilosophical beliefs as the investor,” said Tom Nelson,

senior vice president and director of investment solutionsat Franklin Templeton Solutions. He says that his teamemphasizes outcomes, broad diversification across ge-ographies and asset classes, active risk managementand openness to innovative ideas.

“Our decision-making is driven by a combination of fun-damental inputs and quantitative analysis, something we call‘quanta-mental,’” said Nelson.

Michael J. Kelly, managing director and global head ofmulti-asset at PineBridge Investments, said his philosophyrests on an intermediate fundamental approach to asset al-location. He argued that fundamental approaches have hada better track record identifying turning points in marketsand asset classes compared to quantitative approaches,which he says tend to extrapolate recent history.

“Multi-asset investing should be about turning points andadjusting to changing circumstances,” Kelly explained. He de-fined tactical as nine months or less, a period in which he be-lieves market prices are almost a random walk relative tofundamentals. Yet over the intermediate term, which he de-fined as at least nine to 18 months, if not several years, mar-ket changes connect very well with changes in fundamentals.As for diversification, it’s possible to over-diversify a multi-assetportfolio, a move Kelly called “diworsification.”

“In a world populated with bubbles, committing your-self to every asset class available exposes the investor toevery bubble that comes along,” he added. “We do not thinkthat’s either a return-enhancing or risk-reducing exercise.”

Focus on outliersAsh Alankar, global head of asset allocation and risk

management for Janus Capital Group, said his team focuseson outlier or tail events, contrary to conventional wisdom,which argues for assessing the attractiveness or unattrac-tiveness of assets based on average return and risk.

“Average return and average risk don’t matter in thelong run,” he said. “What matters much more are extremetail risks, downside and upside. Because they have a lastingimpact on compound return, tail risks are the keys to un-locking value in the global capital markets.”

Alankar’s philosophy rests on the core belief that de-livering sustainable and attractive returns requires gettingthe outliers right. “In fact, big moves in a market — up anddown — play a more critical role in delivering attractive com-pound returns, despite occurring infrequently, compared tothe many small swings whose impact is transient.

“When it comes to multi-asset, it’s very important forthe investor to believe in the philosophy that guides theprocess,” Alankar added. “If clients are on board with themanager’s philosophy, surprises can be minimized.” •

MMatchmaker, Matchmaker…With multi-asset strategies, investors and managers need to be on the same page


FREE YOURSELF FROM AVERAGE THINKINGAverage returns and average risks matter less in the long run. While infrequent,

extreme tail risks, up or down, matter more as they have a lasting impacton compound returns. Successfully managing tail risks is

key to maximizing terminal value for investors globally. It is using risk management to enhance returns.

That is the goal we seek to achieve.

Big moves matter.

Learn more at janusinstitutional.com

Investing involves risk, including the possible loss of principal and fluctuation of value.

Janus Capital Management LLC serves as investment adviser.

C-0516-1800 12-30-17



am reminded of the famous Bill Parcells’ quote where hesaid, ‘If they want you to cook the dinner, at least they oughtto let you shop for some of the groceries,’” said Tony Coffey,senior vice president and portfolio manager with FranklinTempleton Solutions, referring to the renowned NationalFootball League head coach.

Coffey believes that if investors want to achieve the de-sired investment outcome with multi-asset strategies, theyneed to give the manager the right tools.

“One reason is for diversification,” he said. “With the2008 financial crisis still in the back of many investors’ minds,investors are focused not just on diversification and correla-tion under normal conditions, but also under extreme condi-tions. When markets go haywire, portfolio managers mustensure that the diversification they have in place is sound.”

“Multi-asset investing means looking at a portfolio in its to-tality, in a holistic way, to see how the component parts impactreturn opportunities and total portfolio risk under different mar-ket scenarios,” explained Brian Meath, chief investment officerfor multi-asset solutions at Russell Investments. “You have tothink in terms of the total portfolio context, not within individ-ual portfolio slices or one asset class at a time.”

Complementing equitiesAccording to Meath, such a comprehensive, “holistic”

definition means that the more inclusive a multi-asset port-folio is in terms of asset classes, the better the opportunityset to meet a client’s objectives. For example, he said thathis team complements equity strategies with alternatives,such as real estate investment trusts, commodities and in-frastructure, as well as return-seeking fixed income, such ascredit, high yield, emerging market debt and bank loans.

“We also prefer to have an ability to trade derivatives likefutures, forwards and options so that we can manage our ex-posures without always having to trade the underlyingsecurities,” he said. “The more of the total pie that we can look

at in a holistic way, the better we believe the outcome is goingto be.”

James Macey, senior vice president and portfolio man-ager for Franklin Templeton Solutions, said investors often askwhether it’s possible to over-diversify a multi-asset portfolio. “It comes down to whether or not the portfolio will actuallybenefit from the asset class or managers you’re looking toinclude,” he said. “You can add more managers and assetclasses as long as there's a correlation benefit.”

Wide varietyUltimately, whatever asset classes one uses or alloca-

tion shifts one makes, there is a wide variety of buildingblocks available to execute the manager’s ideas. The key isto have a view on what role each asset or strategy can playin reaching the portfolio’s overall objective.

“Every choice has to be thoughtful and targeted, withhigh potential to add value,” said Jeff Geller, chief invest-ment officer for multi-asset solutions for the Americas at JP-Morgan Asset Management. “In all cases, we view aninvestment problem through the lens of a multi-asset-classinvestor. In other words, we have a forward-looking view re-garding how asset classes relate to each other (e.g., ex-pected return, volatility and correlation), how managers fitwithin a beta category and across the portfolio, and why oneinvestment option is preferable given a stated objective.”

Assessing individual asset classes can be tricky, ac-cording to Michael J. Kelly, managing director and globalhead of multi-asset for PineBridge Investments. Take illiquidalternatives, for example.

“Many investors chain themselves to a strategic assetmix and spend much of their time selecting underlying man-agers who can deliver security selection alpha,” he said.“The missing ingredient is alpha between asset classes,which is almost a lost art. In that vein, private markets canbe very helpful if investors enter at the right time and for the

“IMulti-asset managers differ about the building blocks used for portfolio construction but agree diversification is key



correct purpose.”He pointed out that the volatility of publicly traded REITs

is around 20%. Those same assets in a private fund mighthave a volatility of 6% to 8%.

“The economic risk is identical, and investors may geta unique exposure they cannot get elsewhere,” Kelly said.“But from 2000 to 2006, many new investors herded intoprivate markets, and as small markets got very crowded,we saw illiquidity premiums become negative. You cannotassume that in the short term you will automatically earnan illiquidity premium for going into an illiquid asset class.And once you’re in, you cannot easily get out. So you’d bet-ter understand all the dynamics of that asset class beforecommitting.”

Ash Alankar, global head of asset allocation and riskmanagement for Janus Capital Group, added that effectivediversification in times of market stress can be tricky, andinvestors may not get there with a traditional approach toasset allocation.

“In 2008, it didn’t matter if you were holding U.S. equi-ties, European equities or emerging market equities,” hesaid. “It didn’t matter if you were holding value or growthstocks. It didn’t even matter if you were holding investment-grade credit or high-yield credit. The irony of diversificationis that when you don’t need it, there’s a lot of it out there, butwhen you need it the most, it can completely disappear.”

Hence, Alankar reduces sources of diversification to afew market betas that remain even when unexpected left-tail events unfold. They include: growth beta (e.g., risk as-sets such as equities and credit spreads); inflation beta(e.g., inflation-linked bonds and commodities); and capitalpreservation beta (e.g., global sovereign bonds).

“When we think of building multi-asset portfolios, wedon’t assume one is protected simply by allocating acrossthousands of instruments and asset classes, because intimes of extreme market stress, many of those become re-dundant,” he said. •

‘The irony of diversification is

that when you don’t need it,

there’s a lot of it out there, but when you

need it the most, it can completely

disappear.’Ash Alankar,

Global head of asset allocation andrisk management

Janus Capital Group



or multi-asset managers, a key challenge is keeping two timehorizons in balance: the long-term strategic vs. the short-term tactical and dynamic elements of asset allocation.

“The long-term view dominates asset allocation just aswe know that, statistically speaking, asset allocation domi-nates total return,” said Brian Meath, chief investment offi-cer for multi-asset solutions at Russell Investments. “Theshort term, more often than not, is about reducing risks —taking risk off the table when we see markets getting aheadof themselves.”

The dynamic part, Meath explained, is a very intensiveexercise. His team strives to avoid undoing all the effort thatgoes into developing underlying strategic allocations for in-dividual client portfolios.

He said that multi-asset portfolio managers don’t comein to work every day thinking that they have to implementtactical trades. “That’s not the way it works at all,” Meathsaid. “What we’re doing is looking at the portfolio for timeswhen we think markets are out of sync with each other, andwhen that happens, we have to be prepared to deal with it.

“Market dislocations happen very episodically,” headded. “You don’t know when the next one’s going to hap-pen, but when it does, taking advantage of it on the clients’behalf requires vigilance and the discipline to stick to yourinvestment principles.”

Different approachesDifferent managers take different approaches to the

trade-off between long- and short-term views. “Just to put a couple of data points around it, long-term

capital market expectations, which is our strategic alloca-tion, is about a five- to 10-year horizon,” said Tom Nelson,senior vice president and director of investment solutionsat Franklin Templeton Solutions. “Our short-term outlook isabout six to 12 months.”

Tactical portfolio adjustments depend on where themulti-asset team finds opportunities and determines it cantake advantage of mispricings in the market. Nelson is care-ful to note that tactical allocation shifts can be made for bothreturn enhancement and risk mitigation purposes. The de-gree of adjustment depends on the degree of flexibility spec-ified by the client.

“Some portfolios might only deviate 5% to 10% aroundthe strategic target, while others may deviate as much as20% to 30%,” he said.

For Ash Alankar, global head of asset allocation and riskmanagement for Janus Capital Group, a practical approach tounderstanding opportunity and risk is to look at signals com-ing from the options markets, which are highly liquid and

provide robust information. “Effectively, options markets give you the price of risk

insurance each and every day for many securities and assetclasses,” Alankar said. “They are solid indicators of how badit can get or how good it can get.”

And while investors need to clearly differentiate short-termand long-term views, they are not mutually exclusive, he said.

Every time period matters“Compound return is just as influenced by short-term

moves as it is by moves far into the future. So when trying tomaximize compound return, every single period matters,”he explained. “You cannot use the excuse that being a long-term investor allows you to ignore short-term risks. Losing50% tomorrow is just as bad and will yield exactly the samevalue as a 50% loss 20 years from now. And in the shortterm, asset performance is almost entirely driven by risk,rather than long-term return expectations.”

He said that risk measures theoretically change daily,and if the market suddenly indicates that downside risk hasjumped, investors must pay attention. “The options marketis a very sophisticated and intelligent system that cannot beignored,” he said.

That raises one big question: How long does a tactical,or dynamic, asset allocation move last? Managers say thereis no expiration date on good tactical ideas.

“Our modest over- and underweights, relative to thelong-term strategic portfolio, capture the output of our pro-prietary quantitative models, insights from our team of fun-damental strategists, and all the dialogue we’ve had withinvestment partners externally and internally,” said JeffGeller, chief investment officer for multi-asset solutions forthe Americas at JPMorgan Asset Management. “Rather thantrying to pinpoint a short-term view or intermediate view, wetry to capture major themes that are moving markets andasset classes.”

Geller said his team had a constructive view on creditcoming out of the financial crisis, but in late 2008 they had noidea whether that would be a six-month view or a six-year view.Ultimately, he said, they held to their high-yield overweight po-sition from the end of 2008 through the middle of 2014.

“We have held overweight positions in core real estateacross our book of business since the middle of 2010 andhave maintained overweight positions to reflect a positiveview on the U.S. economy,” he added. “No one would haveever guessed that six years later we’d still be overweight corereal estate. The key to multi-asset portfolio management iscoming up with a set of core views and revaluating them ona periodic basis.” •

F

Defining Dynamic ManagementMulti-asset strategies strike a balance between long-term strategic and short-term tactical


investment professionals

210approximately

in assets under management

82.5billionUSD

$ On-the-ground presence in

18countries

MULTI-ASSET MANAGER OF THE YEAR

PineBridge Investments


Beta Risk?


“With individual asset class mandates, most institutions take awaythe manager’s charter to manage asset-class risk, focusing them insteadon managing tracking-error risk,” said Michael J. Kelly, managing directorand global head of multi-asset for PineBridge Investments. “That is, ac-tive managers focus on the risk of deviating from the asset class’s over-all market-based return. But if you look at the overall portfolio risk of anactive manager, usually well in excess of 90% of that risk is market risk,not tracking-error risk. So those managers aren’t helping you manage themarket risk of the asset class they reside in.”

Managing risk in a holistic manner, however, is increasingly impor-tant to delivering on institutional objectives.

“Most people, when they’re concerned about pension liabilities, forexample, tend to think about growth assets and hedge assets as two sep-arate pools,” said Jeff Geller, chief investment officer for multi-asset so-lutions for the Americas at JPMorgan Asset Management. “Taking amulti-asset view, though, means looking at it all as one portfolio.”

Geller pointed out that changing the composition of the growth port-folio can affect the level of the hedge. For example, since a big contribu-tor to portfolio risk is equities, he said, a multi-asset manager can diversifyout of equities into investments that may deliver equity-like returns witha narrower range of outcomes, such as extended credit, core real estateand private credit, which gives the client the flexibility to run with modestlylighter hedges on the other side.

One of the struggles investors have with single-strategy asset managersis the difficulty in balancing asset-class risk and tracking-error risk.



“By managing my beta exposures, I may be able to re-duce the overall level of surplus volatility,” Geller said. Butthe success of such strategies is often contingent upon hav-ing a holistic view about the relative opportunity — and risk— associated with individual asset classes, and how they fittogether.

Success depends on managing tail events“If you fall into the hole of a 2008-style drawdown or

even sit out a monster run like the one in 2013, both leavea lasting impact on your portfolio and can permanently im-pair your ability to grow capital over time,” said Ash Alankar,global head of asset allocation and risk management forJanus Capital Group.

Alankar said he believes that successfully navi-gating global capital markets means gettingthe large moves correct. “That kind ofsuccess will add more value thansimply getting average or normalmoves correct,” he said. “This isexactly true despite the factthat the large moves don’thappen very often, and thesmall moves obviouslyhappen almost every sin-gle day.”

Avoiding large tailrisks, however, requiresshort-term discipline.Alankar pointed out thatthe average Sharpe ratiofor the S&P 500 Indexover one year is about 0.3.Over a week or a day, how-ever, it’s about zero. Hence,he argued, “short-term per-formance of any asset class isdriven almost entirely by risk, notby long-term expected return. So tomaximize long-term, compound return, in-vestors need to have a very short-term mind-set when it comes to managing risk.”

The basic message is that multi-asset investors shouldfocus on short-term risk, and when the portfolio hits any pot-holes, it’s the manager’s job to limit their impact.

“The more you can make those disruptions short andshallow, the easier it is to climb back out of them and themore it improves your growth rate over the long term,” saidBrian Meath, chief investment officer for multi-asset solu-tions at Russell Investments. “Multi-asset managers needto deliver experts and systems that can manage risk on anintraday basis, with deep, high-quality research acrossevery single asset class. We didn't see a demand for thatkind of expertise 10 years ago, but we’re seeing it acrossthe market now.”

Winning requires not losingManaging risk from a broader view is what’s driving the

interest in multi-asset approaches, argued PineBridge’sKelly. He explained that static asset allocation — known as“strategic allocation” in institutional investor parlance —often means static risk management. Multi-asset investing,by taking a forward-looking view of the attractiveness of in-

dividual asset classes and balancing risks and rewardsacross an entire diversified portfolio, has become the locusof innovative asset allocation strategies.

“The category has grown,” Kelly said, “because it pro-vides an opportunity for many large clients to look under thehood and ask their managers, ‘How are you balancing allthose return and risk factors?’”

Meath of Russell said that multi-asset expertise is espe-cially relevant in today’s environment, in which investors arelooking ahead to low expected returns, low growth in underly-ing economies, and asset classes that are not cheap — some,in fact, are downright expensive — all with higher levels ofvolatility.

“When you have high volatility in what other-wise might be a sideways trading market, if you

just ride the volatility, you end up at theend of the year with nothing to show

for it except a very bumpy ride,”he said. “If, however, you aregood at making dynamiccalls, using the full toolkitthat we have availablefor downside protectionstrategies, investorsmay be able to tradeacross asset classesin the midst of thisvolatility and squeezeout basis pointsalong the way, poten-tially adding to a long-term compoundedreturn.”

“We’ve been in aseven-plus-year bull mar-

ket in equities since theglobal financial crisis, and we

are seeing a lot of concernaround keeping risks in check,”

added Tom Nelson, senior vice presi-dent and director of investment solutions at

Franklin Templeton Solutions. “And in our view, it’s ex-tremely important to make sure that risks are actively man-aged, because not losing is one of the keys to winning.”

Allocate dynamicallyFor institutions, diversification is the first risk man-

agement tool, but multi-asset portfolios seek to allocatedynamically across multiple beta exposures. Hence theyadd new layers of risk awareness and new demands forrisk management.

Nelson counsels investors to keep an eye on what hecalls the three R’s of risk management: ensuring that risksare recognized, rational and rewarded.

Risks need to be recognized — in other words, investorsshould understand where portfolio risks are coming from,that is, where the big active bets are in the portfolio andwhere the risks are lurking. Risks should be rational in thatthey should be intentional and supported by reasonableviews of the world and the current market regime. And theyshould be rewarded: Investors should be compensated ad-equately for taking on those risks, or those active risk posi-tions should be taken down. •



he success of any multi-asset strategy requires flexibility, whichcan be constrained if investors insist on measuring their man-ager tightly against a traditional market-based index.

“One of the unintended consequences of benchmark-ing a multi-asset strategy to an index is that it handcuffsmanagers and limits their ability to be as nimble as they maywant to be,” said Ash Alankar, global head of asset allocationand risk management at Janus Capital Group.

Alankar suggested that, especially for multi-asset man-dates, the asset management industry should move awayfrom a relative-value focus to an absolute-return focus.

“An absolute-return focus,” he said, “requires investorsto think about beta risk, while a relative-value focus impliesthat investors should not care about beta risk because thatis the benchmark.

“If you are benchmarked to a static 60/40 portfolio, itbecomes very difficult to bring your equity exposure down to5%, for example,” he said. “But what the investor should re-ally care about is whether equities are attractive or unat-tractive. If they are unattractive, portfolio managers shouldnot be prevented from holding cash and reducing equities asmuch as they need to limit the downside risk.”

Moving to absolute-return benchmarksMulti-asset clients in Europe and the U.K. are moving from

relative return to absolute-return benchmarks, according toGreg Gilbert, CEO of Americas institutional business at RussellInvestments. Gilbert has seen some of this among U.S. non-profits, but little among defined benefit plan sponsors.

“Using a relative-return approach to measure multi-asset performance presents some challenges,” he said. “It’soften difficult to gauge success against a relative bench-mark, especially when the manager is focusing on objectivessuch as downside protection that are in the best interest ofthe client but are not incorporated into the benchmark. Wewant to ensure that the client’s best interest is driving theportfolio management decisions, and not a desire to beat arelative-return benchmark. Overall, I believe we’ll see asteady evolution in how U.S. institutions benchmark invest-ment success.”

“With multi-asset, benchmarking is difficult because, tosome degree, the objective itself is uninvestible,” addedMichael J. Kelly, managing director and global head of multi-asset for PineBridge Investments.

“Common objectives are things like LIBOR plus 3% to5%, but that’s simply an objective and not an investiblebenchmark.”

Still, Kelly said he believes that multi-asset strategiesneed both a capital conservation benchmark (e.g., LIBOR plus2%) and a capital appreciation benchmark (e.g., CPI plus 5%).The latter, he said, is more of an equity-like return target.

“But to have predictability around that equity-like returnrequires about a 40-year horizon using equities,” he contin-ued. “If you simply own global equities, it’s a very unpre-dictable path. Multi-asset strategies should be morepredictable, and we seek to earn that sort of objective overrolling five-year periods.”

He suggested that one way to construct a capital appre-ciation benchmark would be to start with a global 60/40 port-folio (i.e., 60% of the volatility of global equities), and thenattach 300 to 400 basis points of alpha. The lower-volatilitybenchmark (compared to 100% equities) augmented with twosources of alpha (asset allocation and security selection) is asteadier path toward earning CPI plus 5% over time.

“Clients are less focused on saying, ‘Here's a fixedstrategic allocation, add a few basis points through your al-location decisions,’” said Jeff Geller, chief investment offi-cer for multi-asset solutions for the Americas at JPMorganAsset Management. “It’s more a matter of describing an in-vestment problem and giving us a level of bandwidth to howthey’re defining success and what their tolerance is fordownside risk. How we express our market and asset classviews is always in support of the client’s objective.

“Where a client has given you a policy portfolio, that ef-fectively becomes the anchor for the decision as to how theymeasure success,” he said. “But increasingly, clients are in-terested in knowing how our multi-asset strategies are per-forming vs. their liabilities, and they are giving us somebandwidth in terms of risk tolerance.”

A challenging questionTom Nelson, senior vice president and director of in-

vestment solutions at Franklin Templeton Solutions, said thequestion of benchmarking multi-asset strategies is chal-lenging.

“It’s a big category that is quite diverse, and manyfunds in the same peer group have different investible uni-verses, risk levels and objectives,” he said. “When setting abenchmark for a portfolio, it’s important to understand theobjective of the portfolio and pick a benchmark that is con-sistent with that objective and investment opportunity set.”

He said that using market-based benchmarks andblended benchmarks that incorporate indexes such as theS&P 500, Barclays Aggregate or MSCI, makes sense for port-folios invested in traditional equities and fixed income. Butto get closer to the outcomes that investors are trying tosolve for with portfolios that use an unconstrained invest-ment opportunity approach often requires a cash-plus or in-flation-plus type of benchmark.

“At the end of the day,” Nelson said, “it comes down to set-ting a benchmark that is consistent with the goal of the portfo-lio and how the portfolio goes about trying to achieve it.” •

TBenchmark choice is essential to ensuring manager freedom and effectiveness


The seven questions everyone should ask about their multi-asset provider.

DOES YOUR MULTI-ASSET PROVIDER MEASURE UP?Single-asset funds are bound to the performance of one asset class. Multi-asset funds can invest in a wide variety of assets, sectors, managers, strategies and geographies. But how do you compare different multi-asset offerings? Here are seven questions to ask before you pick your provider.

OUTCOME-ORIENTED APPROACH – How does your provider design, construct and manage portfolios to achieve specific outcome objectives?

BEST-OF-BREED MANAGERS AND STRATEGIES – Does your provider only rely on in-house portfolio managers? Does it look externally (and globally) for “best-of-breed” managers or strategies?

TOTAL PORTFOLIO MANAGEMENT – How does your provider evaluate combinations of active and passive managers, as well as systematic factor exposures to help optimize the risk-return profile across your total portfolio?

RISK MANAGEMENT – Does your provider monitor—and act on—new opportunities and their associated risks at the total portfolio level? Can it demonstrate its track record?

INTEGRATING INSIGHTS INTO PORTFOLIOS – How does your provider combine insights from capital market strategists with its portfolio management process? What does it do to help ensure these key functions are well-integrated?

DYNAMIC ASSET ALLOCATION – How can your provider demonstrate its ability to respond nimbly to changing market conditions with truly dynamic asset allocation?

IMPLEMENTATION – Does your provider have dedicated investment professionals to efficiently capture and execute investment insights in a timely and cost effective way?

GET THE ANSWERS. GET CONFIDENCE. GET TRUE MULTI-ASSET.russellinvestments.com/multiasset

Copyright © Russell Investments 2016. All rights reserved. Russell Investments is a trade name and registered trademark of Frank Russell Company, a Washington USA corporation, which operates through subsidiaries worldwide and is part of LondonStock Exchange Group. USI-24126


Source: Information includes all JPMAM and is as of March 31, 2016The views contained herein are not to be taken as an advice or a recommendation to buy or sell any investment in any jurisdiction. All information presented herein is considered to be accurate at the time of writing, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. This material does not contain su�cient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. Investors should ensure that they obtain all available relevant information before making any investment. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yield may not be a reliable guide to future performance.J.P. Morgan Asset Management is the marketing name for the asset management businesses of JPMorgan Chase & Co. Those businesses include, but are not limited to, JPMorgan Chase Bank N.A., J.P. Morgan Investment Management Inc., Security Capital Research & Management Incorporated , J.P. Morgan Alternative Asset Management, Inc., and J.P. Morgan Asset Management (Canada), Inc. Copyright 2016 JPMorgan Chase & Co. All rights reserved

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