Multi asset investment strategies have gained popularity in recent years as increased volatility and expensive valuations led investors to seek tailored solutions. Bee Lin Ang reports.
Asset allocation is not easy, as most active investors know. What investors need from their fund provider of choice is a tailored solution that makes the asset allocation decision easier. “There is a broad recognition from investors that the ‘one size fits all’ mentality we had in the past for all asset classes does not work anymore,” says Al Clark, Global Head of Multi Asset at Nikko Asset Management. “The ability to customise solutions makes multi-asset strategies very attractive.”
Clark says high leverage in recent decades combined with relatively low and stable inflation have helped to increase asset prices. “It didn’t really matter in the 1980s and 90s whether you were invested in equities or in bonds – you could still make money,” says Clark. However market dynamics have changed since the global financial crisis: “Household leverage has dropped considerably since 2009, whether it drops further is open for debate, but it is no longer a significant support for asset prices.”
Volatility in equity markets has heightened amid uncertainty over the timing of the Federal Reserve’s first interest rate hike. The six-month chart of the CBOE (Chicago Board of Exchange) Volatility Index spiked in March, April and in August.
So what does a multi-asset strategy offer?
Clark says under multi-asset strategies, portfolio allocation will vary with the clients’ risk profile, however for a general balanced-risk portfolio under current market conditions, Nikko would be underweight sovereign bonds. “That is not to say we don’t own any sovereign bonds; we still need to maintain that defensive component in our portfolios but currently sovereign bonds don’t offer very much value particularly Japanese government bonds,” adds Al Clark.
Increasing demand for multi-asset investment strategies has led Nikko Asset Management to form a specialist team in Singapore, led by Clark. The team, which oversees $24 billion of assets for institutional and intermediary clients, According to the asset consultant Mercer, global investors increased their searches for multi-asset products by 33% in 2013. The US asset manager State Street says there is a limited supply of managers who can provide multi-asset solutions.
Valuation is the key driver of returns, complemented by an understanding of momentum and macro cycle, Clark says. Nikko uses quantitative valuation models at the country and sector level. The price movements of each asset over different periods are also analysed to assess whether the current momentum is likely to persist or deteriorate. Nikko also uses indicators to help determine if cycles influenced by fiscal and monetary policies are a headwind or a tailwind.
In equities, Nikko’s least preferred market is Europe and it would overweight Japanese equities. ‘We will put Asia and the U.S. in the neutral to slightly positive range.” In Nikko’s Global Multi-Asset Conservative Strategy, the allocation to equities is capped at 30% and its target annual return is 12-month SIBOR (Singapore Interbank Offered Rate) plus 3%. BM