Back to basics: why the time is right for a return to multi-asset
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Back to basics: why the time is right for a return to multi-asset

At a Glance

  • The flexibility offered by multi-asset strategies meant that for many years they were the perfect vehicle to navigate market crises
  • As yields ratcheted lower during successive financial pinch points, bonds were no longer able to offer downside protection
  • But the great reset in bond yields and the prospect of inflation falling further means multi-asset is once again an attractive option for investors seeking a smoother return profile

Diversification - Don’t have all your eggs in one basket

The key characteristic that draws investors to a multi-asset portfolio is diversification. Diversification – sometimes referred to as the only free lunch in finance – embeds the idea that if a portfolio holds various asset classes, each with their own return drivers, the outcome is a smoother return profile. In other words, protection on the downside while still participating in the upside market moves.

This was the thinking behind mixed asset funds including traditional balanced funds. But multi-asset funds were designed to go further than balanced funds in one key regard: flexibility.

This simple idea of diversification proved reliable in each of the major crises from the start of the century: the dot-com crisis; the global financial crisis (GFC); and the initial Covid-19 market shock. However, the 2022 sell-off told a different story.

  • Dot-com crisis Global equity market fell 43%, while a multi-asset approach fell 15%
  • Global financial crisis Global equity market fell 44%, while a multi-asset approach fell 23%
  • Covid-19 Global equity market fell 21%, while a multi-asset approach fell 11%
  • 2022 sell-off Global equity market fell 10%, while a multi-asset approach fell 14%
Figure 1: Multi-asset diversification benefit over various crises
Multi-asset diversification benefit over various crises

Source: Bloomberg, as at May 2024

Beyond the balanced fund

Multi-asset funds in their current “diversified growth” configuration were first popularised as a strategy in the early 2000s, and saw demand grow during the GFC and eurozone crisis. Perhaps the main difference was this ability to make greater changes in asset allocation than a traditional balanced fund would find comfortable. This was a key requirement during the 2000-2003 bear market. During that period, balanced funds with their traditional 60% weight to equities saw poor absolute returns as equities almost halved in value. Clients desired an approach that both included more asset classes and a willingness to change allocations more meaningfully – enter multi-asset.

Success set the stage for weakness

All this proved useful. In the GFC, the eurozone crisis and to a lesser extent during Covid, the diversification of multiasset funds proved helpful. However, the strategy embedded a weakness: with each crisis bond yields ratcheted lower, weakening the ability for those same bonds to offer protection. By the end of the Covid-19 shock, bond yields had been driven to a low of 0.17%, when at the turn of the century they were 5.5%1.

The stage was set for diversification disappointment. Bond yields marched sharply higher over 2022 as central banks began to combat inflation. In the UK, with the Liz Truss premiership fiasco adding fuel to the fire, bond yields reached 4.5%, and even in the US they reached 4%. And so, the usual diversification benefit of a 60:40 portfolio wasn’t just absent, it had gone into reverse.

This hiking of interest rates caused a coordinated sell-off across markets and asset classes. Yields on bonds rose (and prices fell) across the spectrum of government bond and credit markets, and equity market price-to-earnings ratios fell to reflect the higher discount rate. Even the greater diversity of a diversified growth multi-asset fund didn’t work with nine out of 10 major asset classes falling hard (Figure 2).

As the major asset classes fell, only small pockets of protection could be found. Our Dynamic Real Return strategy kept portfolio duration (return sensitivity to yield movements) low to insulate returns and essentially shift fixed income holdings more towards cash. Good use was also made of commodities, but even these joined the sell-off from mid-2022. Even with our dynamic approach, the portfolio couldn’t fully immunise against the headwinds in financial markets.

Figure 2: 2022 asset returns
2022 asset returns

Source: Bloomberg, May 2024

The great reset

However, following a period of pain, today the tables have turned. Government bond yields are attractive and back at the levels of 2000 (Figure 3) when the classic multi-asset diversification strategy was born.

Figure 3: core government bond yields back to early 00s levels
core government bond yields

Source: Bloomberg, May 2024

Inflation concerns lingering

However, the switch towards bonds again being able to offer protection in a multi-asset portfolio is not instant. Lingering inflation concerns continue to drive both equity and bond markets up and down together. But our view is that this is a temporary phenomenon. Evidence continues to build that by December this year the lingering sticky inflation concerns will have dissipated, and bonds can once again offer reliable protection.

In the meantime, the high running yields on fixed income mean investors are paid to wait (Figure 4).

Figure 4: yields across fixed income markets have increased to attractive levels
yields across fixed income markets have increased

Source: Bloomberg, May 2024

Back to basics – How multi-asset can help your portfolio

Multi-asset is aimed at investors who cannot afford the risk that comes with equities and pure growth assets in general. The good news is that it can indeed help smooth returns. As we have seen from the past 25 years, it is far more effective when starting yield levels are higher – fortunately, this is the state we find ourselves in today. The balance between risk and return is far better.

Financial consultants often use the Sharpe ratio as a measure that accounts for both risk and return, calculated as return per unit of risk. The higher the Sharpe ratio the better. We note that:

  • Since 1871, a holder of equities over a five-year time horizon has typically seen a Sharpe ratio of 0.84
  • Since 1871, a multi-asset holder of both equities and bonds over a five-year time horizon has typically seen a Sharpe ratio of 1.47

This does mask huge variations of good periods and bad periods for the multi-asset strategy. As you would imagine, higher starting yield levels produce far better multi-asset outcomes, while the strategy can flounder in low starting yield environments.

Figure 5: multi-asset portfolios generally have better risk-adjusted returns than equities
multi-asset portfolios

Source: Bloomberg, May 2024

17 June 2024
Ben Rodriguez
Ben Rodriguez
Fund Manager, Multi-asset
Mahon_Christopher
Christopher Mahon
Head of Dynamic Real Return, Multi-asset
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Back to basics: why the time is right for a return to multi-asset

110-year UK Gilt yield as at 30 June 2020 and 31 December 1999, respectively

 

Important information

For use by professional clients and/or equivalent investor types in your jurisdiction (not to be used with or passed on to retail clients). For marketing purposes.

 

This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services. Investing involves risk including the risk of loss of principal. Your capital is at risk. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. The securities included herein are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. Securities discussed may or may not prove profitable. The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either. Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This document and its contents have not been reviewed by any regulatory authority.

 

In Australia: Issued by Threadneedle Investments Singapore (Pte.) Limited [“TIS”], ARBN 600 027 414. TIS is exempt from the requirement to hold an Australian financial services licence under the Corporations Act 2001 (Cth) and relies on Class Order 03/1102 in respect of the financial services it provides to wholesale clients in Australia. This document should only be distributed in Australia to “wholesale clients” as defined in Section 761G of the Corporations Act. TIS is regulated in Singapore (Registration number: 201101559W) by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289), which differ from Australian laws.

 

In Singapore: Issued by Threadneedle Investments Singapore (Pte.) Limited, 3 Killiney Road, #07-07, Winsland House 1, Singapore 239519, which is regulated in Singapore by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289). Registration number: 201101559W. This advertisement has not been reviewed by the Monetary Authority of Singapore.

 

In Hong Kong: Issued by Threadneedle Portfolio Services Hong Kong Limited 天利投資管理香港有限公司. Unit 3004, Two Exchange Square, 8 Connaught Place, Hong Kong, which is licensed by the Securities and Futures Commission (“SFC”) to conduct Type 1 regulated activities (CE:AQA779). Registered in Hong Kong under the Companies Ordinance (Chapter 622), No. 1173058.

 

In Japan: Issued by Columbia Threadneedle Investments Japan Co., Ltd. Financial Instruments Business Operator, The Director-General of Kanto Local Finance Bureau (FIBO) No.3281, and a member of Japan Investment Advisers Association and Type II Financial Instruments Firms Association.

 

In the UK: Issued by Threadneedle Asset Management Limited, No. 573204 and/or Columbia Threadneedle Management Limited, No. 517895, both registered in England and Wales and authorised and regulated in the UK by the Financial Conduct Authority.

 

In the EEA: Issued by Threadneedle Management Luxembourg S.A., registered with the Registre de Commerce et des Sociétés (Luxembourg), No. B 110242 and/or Columbia Threadneedle Netherlands B.V., regulated by the Dutch Authority for the Financial Markets (AFM), registered No. 08068841.

 

In Switzerland: Issued by Threadneedle Portfolio Services AG, an unregulated Swiss firm or Columbia Threadneedle Management (Swiss) GmbH, acting as representative office of Columbia Threadneedle Management Limited, authorised and regulated by the Swiss Financial Market Supervisory Authority (FINMA).

 

In the Middle East: This document is distributed by Columbia Threadneedle Investments (ME) Limited, which is regulated by the Dubai Financial Services Authority (DFSA). For Distributors: This document is intended to provide distributors with information about Group products and services and is not for further distribution. For Institutional Clients: The information in this document is not intended as financial
advice and is only intended for persons with appropriate investment knowledge and who meet the regulatory criteria to be classified as a Professional Client or Market Counterparties and no other Person should act upon it.

 

This document may be made available to you by an affiliated company which is part of the Columbia Threadneedle Investments group of companies: Columbia Threadneedle Management Limited in the UK; Columbia Threadneedle Netherlands B.V., regulated by the Dutch Authority for the Financial Markets (AFM), registered No. 08068841.

 

Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.

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Important information

For use by professional clients and/or equivalent investor types in your jurisdiction (not to be used with or passed on to retail clients). For marketing purposes.

 

This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services. Investing involves risk including the risk of loss of principal. Your capital is at risk. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. The securities included herein are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. Securities discussed may or may not prove profitable. The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either. Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This document and its contents have not been reviewed by any regulatory authority.

 

In Australia: Issued by Threadneedle Investments Singapore (Pte.) Limited [“TIS”], ARBN 600 027 414. TIS is exempt from the requirement to hold an Australian financial services licence under the Corporations Act 2001 (Cth) and relies on Class Order 03/1102 in respect of the financial services it provides to wholesale clients in Australia. This document should only be distributed in Australia to “wholesale clients” as defined in Section 761G of the Corporations Act. TIS is regulated in Singapore (Registration number: 201101559W) by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289), which differ from Australian laws.

 

In Singapore: Issued by Threadneedle Investments Singapore (Pte.) Limited, 3 Killiney Road, #07-07, Winsland House 1, Singapore 239519, which is regulated in Singapore by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289). Registration number: 201101559W. This advertisement has not been reviewed by the Monetary Authority of Singapore.

 

In Hong Kong: Issued by Threadneedle Portfolio Services Hong Kong Limited 天利投資管理香港有限公司. Unit 3004, Two Exchange Square, 8 Connaught Place, Hong Kong, which is licensed by the Securities and Futures Commission (“SFC”) to conduct Type 1 regulated activities (CE:AQA779). Registered in Hong Kong under the Companies Ordinance (Chapter 622), No. 1173058.

 

In Japan: Issued by Columbia Threadneedle Investments Japan Co., Ltd. Financial Instruments Business Operator, The Director-General of Kanto Local Finance Bureau (FIBO) No.3281, and a member of Japan Investment Advisers Association and Type II Financial Instruments Firms Association.

 

In the UK: Issued by Threadneedle Asset Management Limited, No. 573204 and/or Columbia Threadneedle Management Limited, No. 517895, both registered in England and Wales and authorised and regulated in the UK by the Financial Conduct Authority.

 

In the EEA: Issued by Threadneedle Management Luxembourg S.A., registered with the Registre de Commerce et des Sociétés (Luxembourg), No. B 110242 and/or Columbia Threadneedle Netherlands B.V., regulated by the Dutch Authority for the Financial Markets (AFM), registered No. 08068841.

 

In Switzerland: Issued by Threadneedle Portfolio Services AG, an unregulated Swiss firm or Columbia Threadneedle Management (Swiss) GmbH, acting as representative office of Columbia Threadneedle Management Limited, authorised and regulated by the Swiss Financial Market Supervisory Authority (FINMA).

 

In the Middle East: This document is distributed by Columbia Threadneedle Investments (ME) Limited, which is regulated by the Dubai Financial Services Authority (DFSA). For Distributors: This document is intended to provide distributors with information about Group products and services and is not for further distribution. For Institutional Clients: The information in this document is not intended as financial
advice and is only intended for persons with appropriate investment knowledge and who meet the regulatory criteria to be classified as a Professional Client or Market Counterparties and no other Person should act upon it.

 

This document may be made available to you by an affiliated company which is part of the Columbia Threadneedle Investments group of companies: Columbia Threadneedle Management Limited in the UK; Columbia Threadneedle Netherlands B.V., regulated by the Dutch Authority for the Financial Markets (AFM), registered No. 08068841.

 

Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.

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