An Introduction to Multi-Asset Investing

This article aims to give an introduction as to what multi-asset investing is, explore the advantages and disadvantages of investing in multi-asset funds and gives an insight into future trends in the area.

What is multi-asset investing?

Well, let’s start with the basics. An asset is something from which we can derive value. Standard asset classes include bonds, equities, and cash. A multi-asset fund is therefore one that invests in two or more asset classes. However, these are not limited to the standard asset classes. Other asset classes a multi-asset fund may invest in, include (but are not limited to): real estate, commodities (including energy or precious metals), currencies, inflation, infrastructure, and private equity.

The aim of a multi-asset fund is to generate an attractive return with less risk in comparison to a single asset fund. How do multi-asset funds achieve this? Let us look at an example portfolio that invests in 60% equities and 40% bonds. This is likely to be less risky than an equity-only or bond only investment. This is because both equities and bonds have different risks associated with them. Let us consider a Nike stock and a Brazilian Government Bond, for example, one of the large risks of investing in a Nike stock would be if controversies were to arise about the brand and investors consider the stock to be overvalued and sell it and it goes down in value; one of the large risks associated with a Brazilian Government Bond is the interest rate in the country, if Brazil hikes their interest rate, bonds become less attractive and an investor may lose money. Since it is unlikely that both the brand image and interest rates will change drastically at the same time given that these are uncorrelated events, the risk of the overall portfolio would be reduced as opposed to the same money being invested 100% in the Nike stock or Brazilian Government Bond.

Why invest in multi-asset funds?

There are many benefits to investing in multi-asset funds. The one which we have explored already is the concept of diversification. The fact that the portfolio is exposed to different regions and markets through multiple asset classes reduces the risk of the portfolio because the risks associated with the individual investments are uncorrelated. This means that in times of economic uncertainty the downside risk of the investment is largely reduced. Moreover, it is important to note that “one asset class might outperform during a particular period of time, but historically, no asset class will outperform during every period.” This means that the investor can benefit from the returns and good performance of the different asset classes over different periods of time.

Furthermore, as the number of asset classes and regions racks up for an investment team, the level of market expertise they need also rises. By allowing an investment manager to invest in multi-asset investments for you, it would allow you to tap into markets you may not have much knowledge on otherwise. The investment manager can use this expertise to tailor their funds according to their goals. These goals may be geared towards generating an income for example, and the investment team may invest more heavily in bonds in this fund as a result. Moreover, through economies of scale (an economic concept that suggests the more money you put into something the more benefits you will reap), we can see that investing in multi-asset funds may allow an investor (say a retail investor like you and I) to invest in lots of different asset classes which they would not otherwise be able to afford.

What are the downsides of multi-asset investing then?

If you are looking to invest in a fund with very high returns, you have come to the wrong place. As already suggested, where a multi-asset fund does try to gain an attractive return, this is not its sole purpose. It aims to manage a good level of return alongside low levels of risk. If one individual investment in the portfolio is doing very badly (and is largely uncorrelated to the other investments) then the fund is unlikely to take a large hit from this. Equally on the flip side, if one investment is doing very well then, the fund is unlikely to benefit significantly from this as it is likely to make up a small uncorrelated percentage of the fund.

In addition, due to the high level of expertise required to put together and manage a multi-asset fund, the management fees associated with the fund may also be higher. The management fees may be compounded if the multi-asset fund is a fund of funds. A fund of funds is when a fund invests in other funds. So, if the multi-asset fund at Company X invests in its own global equity fund and emerging markets corporate bond fund, then it is a fund of funds. This may be more expensive as a result.

What does the future for multi-asset entail?

When the economy is doing well it seems that no one really stops to think about the significance of diversification. However, when the economy is not doing very well (e.g. in times of recession like in the Great Financial Crisis or Covid-19 pandemic more recently) we begin to recognise the importance of diversification. However, as people begin to learn from their mistakes and as we are still in a period of economic uncertainty, it seems that multi-asset investing is gaining more traction over time.