What Is Multi Asset?
Multi asset refers to an investment strategy or fund that invests across various asset classes to achieve a desired balance of risk and return. This approach, rooted in modern portfolio theory and investment management, aims to provide diversification by combining different types of investments—such as equities (stocks), bonds, cash, and often alternative investments like real estate or commodities—within a single portfolio. The goal of a multi asset strategy is to smooth out investment returns by ensuring that when one asset class performs poorly, others may perform well, potentially reducing overall volatility.
History and Origin
The concept of combining different asset types for stability dates back many decades. One of the earliest and most notable examples of a multi asset fund is the Vanguard Wellington Fund, established in 1929 by Walter L. Morgan. This fund pioneered the "balanced fund" approach, maintaining a diversified portfolio typically split between common stocks and bonds, with the objective of both capital preservation and income generation. Despite being launched just months before the Great Depression, the fund's conservative and diversified approach allowed it to endure and grow, demonstrating the resilience inherent in multi asset strategies. Over its long history, the fund has consistently maintained a balanced allocation, typically around 60% stocks and 40% bonds. The6, 7 rise in popularity of multi-asset strategies has been significant over the past two decades, with assets under management growing substantially from less than $2 trillion in 2003 to approximately $16 trillion by 2023.
##5 Key Takeaways
- Multi asset strategies combine various investment types, including stocks, bonds, and alternatives, within a single portfolio.
- The primary aim is to enhance diversification and manage risk by offsetting potential losses in one asset class with gains in another.
- These strategies often adapt their allocations dynamically based on market conditions and an investor's risk tolerance and investment horizon.
- Multi asset funds can simplify portfolio management for investors by offering a ready-made, professionally managed diversified solution.
Interpreting the Multi Asset
Interpreting a multi asset strategy involves understanding its underlying asset allocation and how that allocation aligns with specific investment objectives, such as generating current income, achieving capital appreciation, or prioritizing capital preservation. The effectiveness of a multi asset approach is often measured by its ability to deliver consistent risk-adjusted returns across various market cycles. Investors should examine how the fund's managers adjust the weighting of different asset classes, a process known as rebalancing, in response to changing economic conditions or shifts in valuation. For instance, a multi asset fund designed for growth might have a higher proportion of equities, while one focused on stability would lean more heavily on bonds and cash. The performance of multi-asset funds is often benchmarked against a blended index that reflects its chosen asset allocation, providing context for evaluating its success.
Hypothetical Example
Consider an investor, Sarah, who is nearing retirement and seeks a balanced approach to her investments. She opts for a multi asset mutual fund designed for moderate growth and income.
The fund's target allocation is:
- 60% Equities (split between U.S. large-cap, international, and small-cap stocks)
- 35% Bonds (primarily investment-grade corporate bonds and U.S. Treasuries)
- 5% Cash and cash equivalents
In a given year, suppose the stock market experiences a downturn, causing the equity portion of her portfolio to decline by 10%. However, during the same period, bond prices rise due to falling interest rates, with her bond allocation gaining 5%. The cash portion remains stable.
Sarah's portfolio performance would be:
- Equity portion: (0.60 \times (-0.10) = -0.06) or -6%
- Bond portion: (0.35 \times 0.05 = 0.0175) or +1.75%
- Cash portion: (0.05 \times 0 = 0) or 0%
Total portfolio performance: (-0.06 + 0.0175 + 0 = -0.0425) or -4.25%.
While her equity holdings saw a significant decline, the positive performance of her bond holdings partially offset the losses, resulting in a more moderate overall drawdown compared to a portfolio solely invested in stocks. This example illustrates how a multi asset approach aims to mitigate extreme swings through diversification.
Practical Applications
Multi asset strategies are widely applied across various aspects of financial planning and investment. They are particularly popular in:
- Retirement Planning: Target-date funds, a common form of multi asset investment, automatically adjust their asset allocation to become more conservative as the investor approaches a specific retirement date.
- Wealth Management: Financial advisors frequently use multi asset portfolios to construct tailored investment solutions for clients, matching the portfolio's risk profile to the client's risk tolerance and financial goals.
- Institutional Investing: Pension funds, endowments, and sovereign wealth funds often employ multi asset approaches to meet their long-term liabilities and generate stable returns.
- Passive Investing: The growth of low-cost, index-based multi asset exchange-traded funds (ETFs) has made diversified multi asset investing accessible to a broader range of individual investors. These types of funds have attracted significant assets due to their lower costs and simplicity.
Th4e CFA Institute notes that multi-asset strategies are considered a "supreme discipline in investment management" due to their broad investment universe encompassing all global asset classes.
##3 Limitations and Criticisms
Despite their advantages, multi asset strategies are not without limitations. One common criticism is that during prolonged bull markets driven by a single asset class (such as large-cap U.S. equities), a diversified multi asset portfolio may lag behind a concentrated investment in that top-performing asset. This is because the other asset classes within the multi asset fund might temper overall returns. Recent trends have shown some multi-asset funds experiencing outflows and facing pressure on fees, particularly traditional offerings that have struggled to outperform benchmarks compared to lower-cost, index-based allocation portfolios.
Ad1, 2ditionally, the effectiveness of diversification relies on the imperfect correlation between different asset classes. In periods of extreme market stress, correlations can sometimes increase, meaning that asset classes that typically move independently may fall in unison, diminishing the protective benefits of diversification. Furthermore, multi asset funds often involve active management, which can lead to higher expense ratios compared to single-asset index funds, potentially eroding returns over the long term.
Multi Asset vs. Asset Allocation
The terms multi asset and asset allocation are closely related but refer to distinct concepts. Asset allocation is an investment strategy that defines how an investor’s portfolio is distributed among different asset classes based on their risk tolerance, investment horizon, and financial goals. It is the theoretical framework or the plan for distributing capital.
Multi asset, on the other hand, describes a type of investment product or fund that implements an asset allocation strategy. A multi asset fund, such as a balanced fund or a target-date fund, is a ready-made solution that manages the asset allocation for the investor, often adjusting it over time. While multi asset funds are a practical application of asset allocation principles, asset allocation itself is the broader investment decision-making process that can be applied to any portfolio, whether managed through a multi asset fund or constructed individually by an investor.
FAQs
What are the main benefits of a multi asset investment?
The primary benefits of a multi asset investment include enhanced diversification, which can help manage risk and reduce volatility by combining assets that may perform differently under various market conditions. It also simplifies portfolio management by offering a professionally managed solution.
How does a multi asset fund manage risk?
A multi asset fund manages risk by spreading investments across different asset classes like stocks, bonds, and cash. This means that if one part of the market experiences a downturn, the other parts might hold up better or even gain, cushioning the overall impact on the portfolio. The fund managers also typically adjust the allocation based on market outlook and the fund's stated risk profile.
Are multi asset funds suitable for all investors?
Multi asset funds can be suitable for a wide range of investors, especially those seeking a diversified, professionally managed solution without the need to actively manage individual asset class exposures themselves. They are particularly popular for long-term investors and those looking for a balance between growth and stability, as the fund’s allocation can be chosen to match an investor's specific risk tolerance.