Multi Asset Investing in 2012

There is no shortage of names for the investment approach that is set to be this year's most popular strategy with institutional and retail investors. There is, however, an apparent shortage of managers to run it and marketers to sell it.

Some call it multi-asset investing. Others refer to it as diversified growth, dynamic asset allocation, global absolute return or new balanced.

It aims to make money from switching between asset classes, and by taking positions on facets of the markets such as volatility or bond duration. It takes long and short positions, not unlike global macro hedge funds or global tactical asset allocation strategies; but its proponents insist it is not a hedge fund strategy. Diversified growth is a mainstream asset management activity.

Those who have worked in the industry for more than a decade will notice a similarity between multi-asset investing and the approach that pension schemes used to call balanced management. Each gives the asset manager discretion over asset allocation. But balanced managers focused most of their efforts on picking stocks. Multi-asset managers focus mostly on picking asset classes.

The discipline has grown exponentially. Ruffer and Newton were early proponents of the strategy, launching versions of it before the turn of the millennium. Then in 2001 BlackRock came on the scene, followed by Baring Asset Management two years later, Standard Life Investments two years after that, Schroders in 2006, Henderson, Investec and Threadneedle in 2007, and Baillie Gifford, F&C and Fidelity in 2008. Other providers include Jupiter Asset Management and JP Morgan Asset Management.

Firms from an investment consulting background have also been offering this service. It has been part of PSolve's range since 2001, Russell Investments has a multi-asset service that it is planning to push this year, and Mercer has a diversified growth product for defined contribution pension schemes. Towers Watson's implemented consulting service uses elements of dynamic asset allocation.

The number of providers has reached 50 and continues to expand. Invesco Perpetual launched three multi-asset funds to the retail market in February, which will use asset allocation to try to manage risk. William Blair, a US fund manager, acquired a multi-asset team last year and plans to begin marketing this team's services in the UK this summer. Goldman Sachs Asset Management hopes to launch a multi-asset fund by the end of the year and Aberdeen Asset Management is thinking about it.

Ruffer is seen as the leader in the institutional market, having given consistently excellent investment returns. Meanwhile Standard Life Investments' Global Absolute Returns Strategy, or GARS, has been taking in the most money, and has this year expanded its sales to the US and continental Europe retail markets.

These products are in demand. UK and Irish pension schemes, in particular, have now placed more than £50bn in these strategies, and one of the UK’s largest investment consultants says it is being asked to undertake a search or two a week for this strategy, on behalf of its institutional clients.

Some believe the total assets in the strategy could, over the next few years, easily reach £300bn, as defined benefit pension schemes see it as a lower-risk replacement for equities and defined contribution schemes use it to gain exposure to alternative investments. On top of that will be new money from retail investors and from overseas.

The potential has not been lost on asset management chiefs. If they haven't done so already, many are thinking about the possibility of their company joining in. This should give rise to a variety of employment opportunities.

A successful multi-asset team either needs a combination of expertise, or its members need to be good generalists who can draw on the expertise of specialist teams elsewhere in the organisation.

The European chief executive of one firm offering the strategy says that to run a diversified growth fund successfully, a company needs strong capital markets research, a real depth of understanding of how the markets work; and the knowhow to construct positions that will put the investment ideas to work.

These skills are different from the stock-picking skills that defined fund management in the last decade. Anyone with a good record of investing across and between asset classes should find themselves in hot demand.

But it is also possible for someone with a stock-picking or other background to make a success of themselves as a multi-asset manager.

Stock-pickers with a fixed income background may have a slight edge over equity managers. The concepts and language of bond investing have something in common with the multi-asset strategy; investing in different seniorities of corporate debt, taking a position on the yield curve, trading bonds in once currency against those of another are common to both disciplines.

Fund managers with other skills may also find that opportunities are open to them, depending on the company and its approach to multi-asset investing. Some diversified growth teams focus so exclusively on asset allocation that they just use exchange-traded funds to give them the exposures they want, but others want their investments in each of the different markets to be managed actively. These latter teams either have to have stock-picking skills in-house, or they have to have manager selection capabilities.

Whatever the fund manager's skills, however, anyone who wants to succeed in multi-asset investing will have to adjust to new ways of thinking about investment.

One multi-asset manager says: "I wouldn't want to say that you can't have talented multi-asset investors who come from an equity or bond fund management background. But if you look at those managers, there's always a benchmark focus embedded in what they do. We stay quite clear of any benchmark."

Those with experience managing global macro hedge funds should be familiar with this emphasis on absolute returns, and with the focus on asset classes. The combination of economic forecasting and market trading is the hallmark of global macro.

But they, too, would have to acclimatise to multi-asset investing.

There are three key differences between multi-asset and the classic global macro hedge fund.

One is performance targets. Multi-asset funds aim at lower risk, lower returns. They typically target inflation-plus 5% with bond fund-like volatility.

A second difference is timeframe. One multi-asset manager says that, rather than trying to time his entry and exit from particular markets, he aims to tap into themes that will emerge over the course of several years. His current portfolio reflects more than 25 such themes.

Often the market will go against the theme, sometimes for several quarters. For this reason diversified growth fund managers typically set themselves performance targets over three-year periods.

A third difference between global macro hedge fund managers and multi-asset managers is the spirit of transparency.

Another multi-asset manager says: "Global macro fund managers do many of the same things we do, but they do so in a very different way. They take a lot of derivatives exposures and use fancy financial engineering.

"In contrast, simplicity is crucial for us. We use simple building blocks that you can easily take apart."

This focus on simplicity is a response to the wishes of clients, especially institutional clients.

The strategy can be complex - shorting five-year US Treasuries to finance long positions on 3-month Treasuries, for example, or going long the Nordic kronor and short the Swiss Franc, or using Australian dollars to hedge an exposure to Chinese equities. But investors want to be able to understand it.

The desire to render multi-asset investing understandable therefore demands a lot from the fund managers, who have to find simple ways to achieve their goals.

But it should also represent an opportunity for talented marketers and product specialists. Marketers with an aptitude for explaining potentially confusing investment strategies should find their talents in demand.