Strong returns across equity and bond markets over the period since the financial crisis have left few major equity or bond markets in “cheap” territory. This makes for a challenging environment for strategies that rely heavily on equity and bond beta as the key source of return.
Multi-asset strategies rely heavily on market returns across the major equity and bond markets (“beta”) as the key driver of return, with relatively little active management overlay, resulting in fairly static asset allocations. Such strategies will typically be found in the “core” multi-asset universe as well as at the simplistic end of the risk parity universe. These strategies are often anchored on a given split between equity and bond markets with investments largely constrained to positions that benefit if markets rise in value (that is, “long only” investments).
Although we don’t think the current market environment lends itself to beta-heavy multi-asset approaches, we recognize that such strategies can make sense for some investors. In particular, heavily fee- and governance-constrained investors may have good reason to allocate to relatively straightforward multi-asset approaches as a low-cost means of achieving a diversified market exposure.
However, investors not facing significant fee and governance constraints should consider reviewing allocations to beta-heavy multi-asset strategies. As noted above, we believe the underlying components of these strategies could be designed to improve the risk-return profile by making use of additional return drivers (such as style-factor exposures), active management, and a broader opportunity set. In particular, we favor more dynamic mandates (for example, idiosyncratic multi-asset or multi-asset credit funds) or strategies driven more by manager alpha and non-traditional return drivers (for example, hedge funds) in the current environment.