Investor concentration
The biggest challenge for multi-asset investors has been the relentless performance of a narrow part of the equity market, according to Oliver Blackbourn, multi-asset portfolio manager at Janus Henderson Investors.
He says: “Diversification is a key principle embraced by anyone buying a multi-asset strategy, but this has not been the purported 'free lunch' in a world full of fear of missing out. In fact, investor concentration has now been narrowed to just seven stocks, out of thousands globally.
"Yes, most of these stocks seem to be benefiting from being at the cutting edge of another technological revolution, but they will also not be the only winners over the long term and will almost certainly face greater competitive pressures.
"This hasn’t been the only challenge for multi-asset strategies over the last decade and half. Very low bond yields led to low expected returns from that portion of portfolios, particularly more risk-averse approaches.
"Clients buy multi-asset strategies mostly for either improved risk-adjusted returns or income. The one-way traffic in US technology stocks has looked better for the former, and low bond yields created disappointment in the latter for a decade.”
Interestingly, Elliott Frost, investment manager for Lumin Wealth, says multi-asset funds have recently struggled to put clear blue water between them and their benchmarks, and most have failed to outperform passive equivalents.
He adds that with recent research by Fundhouse revealing in a study of 160 multi-asset strategies within the IA Mixed Investments 40-85 per cent shares sector, less than 15 per cent managed to outperform a global equity index over the 10 years to March 2024, although this number is better incorporating portfolios with a UK bias.
He says: “Many of these multi-managers have made the wrong asset allocation decisions influenced by macro forecasting, which is why we believe time in the markets beats timing markets. Consistently getting these calls right is statistically very low.”
He added that the industry has had numerous challenges that have caused major shifts in these types of portfolios.
This has included Brexit, Covid-19 and regional conflicts, which propelled multi-asset funds from a low or negative-rate environment to contractionary policy.
Frost adds: “We saw portfolios which were ‘defensive’ and held allocations to fixed interest have large losses in 2022, and even diversifiers become unstuck as rates rose, causing higher volatility to those portfolios considered ‘low risk’.”
However, he says these challenges have severe short-term impacts on performance and outlooks, and it is important to remember that multi-asset portfolios continue to be a highly viable investment option over the long term.
Frost adds: “We see the most optimal portfolios investing ‘pactively’, using active funds, and then passive indices in areas where managers have a statistically low chance of outperforming.
