Multi-asset investing will become the new savings strategy, as low-yields force managers to rethink the traditional 60/40 portfolio and recalibrate their return expectations.
With investors contending with diminishing yields and fixed income failing to provide defensive characteristics, Daniel Seiler, head of the multi asset boutique at Vontobel Asset Management, said that multi-asset risk-controlled investing will find a new audience.
“If savings doesn’t provide you any interest rates any more, then this cascades through all the other investments,” Seiler said in an interview with Investment Magazine’s Market Narratives.
“The two terms, savings and investing, will have new meanings going forward because with savings, you don’t get any interest rates, and multi-asset investing, which is controlled for risk, will be considered the new savings.”
With savings plans failing to generate returns due to rock-bottom interest rates, Seiler has predicted investors will begin to develop multi-asset portfolios rather than just cash.
“Multi-asset is basically about controlling risk, otherwise you’d go straight into equities,” Seiler said.
“But since the bonds on the safe side will probably not deliver the returns they used to have, it’s crucial for investors to revise their expectations going forward.”
With investors scouring markets for yield, many multi-asset managers have moved towards emerging market bonds, corporate bonds and assets that are riskier than traditional government bonds, to reach return targets.
“But this can become tricky as you introduce risk, lose the diversification potential, and therefore the core of every multi-asset portfolio,” said Seiler.
“If you try to pick up yield you can lose correlation, and the discipline of managing a multi-asset portfolio is about balancing this.”
The rise of central bank power, and its influence on asset prices, has led to negative correlations between risky and non-risky assets, which was the “perfect environment” for multi asset portfolios over the last twenty years, Seiler said.
But since lower bound interest rates have taken hold around the world, the crucial question is whether this regime will continue.
“Central banks are still very dominant and they will continue to keep up the negative correlation between risky and non-risky assets,” Seiler said.
“However the locomotions in the market this year, that were exogenous by nature, have shown investors need to revise their expectations that we have to face lower returns through the next regimes.”
Multi-asset managers who were following the yield pickup suffered as the Covid19 pandemic shook global markets, particularly as volatility shot up, and non-risky assets were unable to do the heavy lifting as riskier assets sold off.
“Typically all risk-based strategies would reduce their exposure to control the volatility, but in this case you did this after the first hit and then missed the rebound,” Seiler said.
“This rebound was sentiment driven and very skewed to tech companies, but the question is how we can do that differently when non-risky assets will probably not deliver the returns they used to.”
Seiler said multi-asset managers will use other risk measures to manage the change in environment, adding artificial intelligence is one such tool to help multi-asset investors cut through the market “noise”.
“AI will help you see the most dominant patterns and give you clarity,” he said. “But of course, it will not revolutionise how quant, systematic investors invest, a lot of old techniques are simply old wine in new bottles.”
Seiler said AI will be useful to put figures to abstract ideas like ‘sentiment’ which will help investors understand market drivers.
In order to eke out returns, Seiler conceded multi-asset investors will likely formulate their own views on market direction, but warned this must be implemented systematically in order to keep the multi-asset portfolio stable and reap the benefits of diversification.
“You need a very solid and stable portfolio to start with that allows you to tilt the portfolio but not too much.” Seiler said.
“If you then begin to formulate your views, you must implement them systematically, only this will help you evolve to learn and evolve to improve.”
Seiler said it’s impossible to take into account all the different market drivers, so investors should focus on the main drivers they understand and implement them from a neutral starting point.
“It’s from there you will deviate and take on more risk, so you must start with a very solid framework to control this risk,” Seiler said.
Seiler said if managers are aiming for 200 or 300 basis points above the risk free level, they must reconsider their expectations.
“If they want to keep those expectations from ten years ago, then they will become more risky in their allocation or it won’t work,” he said.
“In order to control for risk, multi-asset investing will become the new savings, that way investors can manage for an uncertain future, free from human judgement and deceiving facts.”