MULTI-ASSET strategies and portfolios have grown in prominence since the financial crisis. WEALTH speaks to Al Clark, the global head of multi-asset, Nikko Asset Management, on why the strategy makes sense.

Q: What is multi-asset investing, and how does it differ from a balanced fund?

I think it probably means different things to different people. At Nikko Asset Management, our multi-asset solutions represent the following key components:• No “must own” assets: Unlike typical balanced funds that invest in, say, 60 per cent equity and 40 per cent bonds as dictated by their benchmark, our multi-asset solutions have greater flexibility to invest in the assets we think are most attractive. We are not forced to own an expensive asset simply because it is in the benchmark. Instead, we do comprehensive research on the assets in which we invest and choose the mix we believe has the highest chance of delivering our client’s objectives.• Allocate by risk, not capital: Once we decide on the most attractive assets, we make our allocation based on risk rather than capital. A balanced fund that allocates 60 per cent of its capital to equities and 40 per cent to bonds typically has more than 90 per cent of its risk or volatility coming from the equity-risk premium (even higher if the bonds are credit heavy).

In our multi-asset portfolio construction, we analyse the different return drivers or “risk premia” and allocate risk to those that are appropriately priced.• Manage downside risk: Any credible investment solution needs to pay attention to the severity of losses. A typical 60/40 balanced fund may be happy to deliver a return of minus-20 per cent if its benchmark is down 25 per cent. We would not. Our multi-asset solutions have a proactive and focused approach to managing the downside, building layers of protection into the portfolio to minimise losses in a falling market. This does not, however, guarantee that the portfolio will be free from losses.

Q: Multi-asset strategies appear to have grown in popularity after the 2008 crisis. How much longevity is there in this strategy?

Multi-asset has indeed become more popular. We believe this is an acceptance from the investment community that asset allocation is difficult and there is longevity in this strategy.

Based on our research, asset allocation was not that hard during the disinflationary trend from 1983 to the early 2000s. The opportunity cost lost by making the wrong asset allocation call was unusually low. For example, if you chose to be overweight equity and underweight bonds, it did not

significantly impact your portfolio returns as both asset classes produced a stunning rally over that 20-year period.

Fast forward to today, and that opportunity cost is significantly higher. Making the wrong call through 2008 and 2009 obviously had a significant impact on your portfolio returns. Asset allocation is now much harder. We believe this dynamic will continue as we work through the implications of the end of a debt super cycle, central bank experimentation and changing inflation regimes.

Multi-asset solutions offer a product that makes the tough calls for investors, delivering an absolute return through sensible asset allocation and disciplined loss control. We believe this is why they have been, and will continue to be, very popular.

Q: What place does this strategy have in an individual’s portfolio?

If you believe, as we do, that asset allocation will remain difficult, then a multi-asset solution should be a core part of an investor’s portfolio. As numerous academic studies have shown (Brinson, Hood & Beebower 1986, 1991; Ibbotson & Kaplan, 2000), asset allocation is the key determinant of portfolio returns.

In a benign environment where asset allocation calls are not that important, then it might make sense to do it yourself. But in the current environment where asset allocation is more difficult, it makes sense to invest in a multi-asset solution.

Q: How do investors discern whether a manager truly has the capability for multi-asset versus one who is merely opportunistically seeking to raise assets?

I think the following criteria might help:• Business: The manager should show a commitment to the strategy by setting up a dedicated multi-asset team, accountable for asset allocation and independent of the equity and bond teams;• Experience: The multi-asset team has many years of experience in asset allocation and is not a group of individuals cobbled together from the equity or bond teams;• Asset breadth: The asset manager should have the capability to

invest across a global range of assets, not merely those that are thematic or region-focused.

Q: Most investors probably understand the ability to make tactical shifts in a multi-asset fund. But what risks should be actively monitored and controlled?

Shortfall risk is the risk that the investment does not deliver the return objective over the designated time frame, and the investor is left short of capital. We believe all decisions should be made with reference to minimising shortfall risk. We would like our products to deliver what our investors expect.

The multiple asset class exposures in a multi-asset solution bring with them multiple investment risks such as equity risk, duration risk, credit risk, currency risk and liquidity risk. We have proprietary systems to monitor and manage all these risks to ensure we minimise the shortfall risk.

Q: How would you allocate assets in today’s environment with a six to 12-month view?

As mentioned earlier, we believe this is a difficult time for asset allocation. Ultra-loose monetary policy

has created a rally across the majority of asset classes to levels where valuations are no longer

supportive. Few people would argue that sovereign

bonds are expensive, but they can still play an important defensive role in a multi-asset

portfolio while inflation remains contained. We prefer sovereigns with a relatively higher

yield such as US Treasuries or UK Gilts over JGBs (Japanese Government Bonds) or German

Bunds, where the potential payoff looks asymmetric.

In credit markets, spreads have continued to narrow, with most markets at or near post-Lehman lows, offering little value. The lack of secondary-market activity may also prove problematic, should liquidity be tested at some point in the future. We pre-fer Asian credits to their global counterparts as we believe the extra pick up in spreads more than covers the perceived extra risk.

Equity markets are over-due for a correction, but with

monetary policy remaining accommodative and earnings

growth accelerating in some key markets, the bull market

in stocks – now over five years – looks to still have some legs. Our preferred equity markets are Asia on valuation support, particular-ly in the north, and Japan as we see aggressive policy positively impacting markets. n W

Making the tough callsNikko Asset Management’s Al Clark gives his take on multi-asset strategies

asset manager

Few people would argue that sovereign bonds are expensive, but they can still play an important

defensive role in a multi-asset portfolio while inflation remains contained.

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