Higher volatility in stock markets does not just create uncertainty for investors, but raises questions about how their portfolios are invested. We look at multi-asset investments and see how they can help investors ride out the market’s swings.
Tim Cooper is an award-winning freelance financial journalist with 20 years' experience.
Between 2009 and 2014, investors were blessed with strong, broad-based returns on their assets and low volatility. But in the last two years, returns have been more erratic. Given the record highs that markets have reached, the prospects for returns may be more limited in future years. As the chart shows, future returns, from equities, for example, have typically been lower when valuations have been high.
In this environment, asset allocation and other diversifying factors such as currency will have to be managed much more aggressively, creating a great opportunity for the multi-asset investor. It also highlights the importance of managing volatility and ensuring that clients are matched to risk profiles. It is vital that their expectations on risk/return and capacity for loss are met.
Future returns are typically lower when starting valuations are high
Source: JPMorgan, MSCI Europe Index, Shiller price/earnings (P/E) ratio, 31 May 1980 to 31 May 2017. Note: Returns data ends at 2007 because after this data a full 10-year period has not yet completed.
Over the last decade, many of the relationships between traditional assets have become distorted. The extraordinary monetary stimulus of central banks that followed the financial crisis has helped create a situation where assets that used to be uncorrelated have become correlated, making diversification harder.
But active multi-asset funds can address this by diversifying styles, return drivers and risk; and by looking for uncorrelated assets, for example, in alternatives assets.
Paul Lindfield, wealth management partner at Manchester-based Sedulo Wealth Management, says that increased risk and uncertainty in markets is a major reason for using active multi-asset funds, which he does for clients with up to about £150,000 to invest. "In a changing world, it is a far superior proposition than a model portfolio that could become disjointed and cause portfolio drift," he says. "I like them because they target risk on volatility, and ensure the right strategic allocation to achieve that but with a tactical overlay.
"It allows us to focus on the day-to-day planning, the tax wrappers and the client relationship. We measure attitude to risk and capacity for loss using Distribution Technology, then test this in conversation with the client. After we have identified their risk tolerance, we know that we can rely on a risk-targeted multi-asset fund manager to perform within those volatility tracks, so the client knows what to expect."
Rob Broad, managing director of Laurencekirk-based Broad Wealth Management, uses active multi-asset funds as a core holding for the bulk of his clients and adds satellites to add diversification."I like these funds because you know you are getting regular tactical changes and know that the clients’ money is getting reviewed regularly," he says. "All the multi-asset fund managers, especially the larger ones like Janus Henderson, do a lot of due diligence, which gives me confidence in recommending them to clients and means I know I won’t have any uncomfortable meetings.
"Over the last five years, risk profiling has become increasingly important, which is why risk-targeted funds have become popular as they make that easier to manage."
An income-based approach
The Henderson Core Multi-Asset Solutions funds are risk targeted, and aligned to Distribution Technology’s risk bands 3, 4, 5 and 6. That means they are outcome-related solutions rather than just trying to beat a benchmark and clients know from the outset what volatility range they are likely to get.
Alistair Creevy, managing director of Glasgow-based Independent Advisers (Scotland) has a panel of active multi-asset funds, which includes the Henderson Core Multi-Asset Solutions range of funds. He says using this range saves time and research as it provides an asset spread in line with client risk profiles and keeps these on target.
"Why recreate something that the professional investment houses can do for you?" says Creevy. "It is in line with our risk profiler Distribution Technology, which is essential, and is careful to keep within volatility and maximum drawdown limits that the clients can see and understand.
"The other funds on our panel are mainly accumulation. Income-yielding multi-asset funds like Janus Henderson’s are very hard to find. We had one other on the panel, but it was disappointing, as it was more of a bolt-on that they created to meet demand rather than because they fundamentally believe in income-yielding multi-asset.
"In contrast, Janus Henderson firmly believes in an income-based approach and has designed its portfolios within their Core Multi-Asset range around that.
"Plus it has a good record in individual asset areas such as property and bonds - so a multi-asset strategy seems to be a natural progression. Three of the funds in the range also pay monthly [one pays quarterly] and that is smoothed over the year so clients know what they will receive. It is also low cost."
Creevy says these funds are therefore a natural fit for retired clients as they like the monthly income and the good spread of assets, with low cost and competitive yields of 3.4% to 4%*. "You can get higher elsewhere, but not in a risk-targeted fund, like this," he adds.
- Active multi-asset funds are increasingly popular in an uncertain economic environment
- Advisers can rely on the manager to monitor the funds carefully and keep them within risk tolerance bands
- Active multi-asset funds also have flexibility to look for uncorrelated assets, such as alternatives, which can help to improve returns and reduce volatility
*Yields are as at 31 May 2017. Yields may vary and are not guaranteed.