Equities have started 2013 strongly as macroeconomic issues appear to have temporarily reached a plateau in both Europe and the US
However, many think the sharp rally, which has seen the FTSE 100 soar past the 6,000 mark to reach a five year high of 6,347.24 on January 28 2013, is set for a correction.
If this is the case and equities suddenly fall back, with historically low interest rates keeping guilt yields low and corporate bonds in what some would call a ‘bubble’, where should investors look next for returns.
Multi-asset funds seem the logical choice – the very title suggests a range of investments - but where are managers finding good investment opportunities outside of the traditional bonds and equity sectors, and at what risk?
Broadening horizons
Justin Onuekwusi, multi-asset fund manager at Aviva Investors, explains that 10-15 years ago traditional multi-asset fund invested in three main asset classes: active equities, active fixed income and cash, with a few investing in property.
“Since then you’ve seen the average retail fund invest away from those asset classes really for two reasons, one is for diversification as asset classes outside those traditional ones can help smooth out the journey of investors over the investment cycle.
“Also there has been a demand for multi-asset fund managers to be more active in their asset allocation, so the more tools you have in the box the more levers you have to pull and the more active you can be in your allocation.
“But also these alternative assets have become more investable.”
Asset classes now being utilised by multi-asset managers range from property, commodities, infrastructure, absolute return funds, structured products and alternative fixed income instruments such as mortgage backed securities (MBS), collateralised loan obligations (CLOs) and floating rate bonds.
The options are wide-ranging depending on the investment remit of the fund and the investment approach of the manager.
Mona Shah, assistant fund manager on Rathbone multi-asset portfolios, adds: “Investors must look at ‘alternative’ strategies in tandem with the rest of their investment objectives. It is imperative to buy a product that fits within the context of the overall portfolio.”
Rob Burdett, co-head of multi-manager at F&C Investments, says the team tends to only invest in assets outside of the ordinary “when we really believe they are going to provide a decent return”.
He adds: “There is sometimes a danger people invest in other assets just because of correlation and things like that, and they can very much change, as we saw in 2008.”
Currently the manager is looking at income producing areas in light of historically low interest rates and higher inflation.
“We are looking for things that will continue to provide a decent yield if interest rates changed, without the capital loss you would have in a gilt or investment grade corporate bond if interest rates go up. If we can find some inflation protection then that’s good too,” explains Mr Burdett.
