Need for Multi-Asset Investment Portfolios in Changing Times

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There was a time where the starting point for an investment portfolio was the 60/40 approach, with 60% invested in equities and 40% in bonds. This would change depending on numerous factors including appetite for risk, investment goals and time horizon.

For example, the old adage used to be that you should “own your age in bonds” as a way of minimising investment risk as you got older. This is because when we saw tough periods where equities would sell-off, bonds would conversely rise in value.

But recent years have seen this change – particularly as both assets can be sensitive to inflation. As a result, there has been an increasing amount of correlation between the two, for example 2022 saw both equities and bonds produce negative returns, while the opposite was true for 2023.

Ultimately you want your assets to be less correlated – to give you smoother returns. Because alternatives tend to behave differently than typical equity and bond investments, adding them to a portfolio may help to lower volatility, provide broader diversification, and enhance returns.

Alternatives come in many different forms. Property is the most well-known, but we also have the likes of listed-infrastructure, commodities (industrial and precious metals like gold), renewables (wind/solar) and private equity to name a few.

A rise in interest among retail investors

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Liquidity issues and complex structures in this market have traditionally made it the realm of the institutional investor – but the world of low rates, sharp bouts of volatility and concerns about the correlation in performance of bonds and equities in times of stress have made alternative/private assets more attractive to the likes of high net worth and mass affluent investors.

However, uptake could’ve been faster for this cohort – with numerous barriers to entry stemming the tide of retail assets. The most obvious of these is the “liquidity mismatch” between these types of assets and the need for shorter time horizons and greater liquidity from retail investors. This has been highlighted in the property market in recent years – with forced sales of real estate assets resulting in a significant loss in value.

One way around this has been to invest in these structures through multi-asset managers, many of whom invest in various specialist investment trusts. Multi-asset managers access these investments more readily and have the time to analyse the pros and cons of each asset class at various points in the investment cycle.

Investment trust specialists

The benefits of the investment trust structure are numerous – the critical difference between them and the likes of unit trusts and Oeics is they are closed-ended – this means if you try to buy a trusts’ shares after it launches you can only do so if an investor wants to sell their shares. Contrast this with a unit trust or Oeic, where the manager makes it possible to invest by creating new units and then invests this new money. However, when investors want to sell in an open-ended fund, a manager may have to sell an investment(s) to make sure this occurs. There have been examples where this has been to the detriment of a fund in the past, with managers having to sell good investments to give their fund the liquidity to return money to selling investors promptly.

There are also discounts on trusts – where market sentiment can dictate a trust’s share price (yes, trusts are companies on the stock market). A trust could be on a discount for a poor reason, making it an attractive bargain for a manager who can see through the issue.

These opportunities are not always easy to decipher. Investing in the likes of GP surgeries, battery generators, wind farms and debt lenders is a complicated business – and you must get under the bonnet of these investment trusts (short and long-term) and that often means meeting the managers. A good example would be during Covid when investment trusts investing in the likes of solar panels and wind farms fell 40-50% in a few days. Many would panic, but for multi-asset managers, who are familiar with these business, they would often see it as a buying opportunity. The sun still shone, and the wind still blew and many of these investment trusts recovered those losses quickly.

Funds to consider

funds-to-consider-for-multi-asset-investment-portfolios

As manager of the Brooks MacDonald Defensive Capital fund, Dr. Niall O’Connor’s job is to invest in ‘other’ assets – avoiding your bog-standard equities and bonds and finding opportunities in other areas. This includes the likes of specialist energy trusts (Riverstone and NextEnergy Solar); speciality lending (VCP); Tritax Eurobox, a property company investing in distribution centres across Europe; and abrdn Property Income trust*.

Another is BNY Mellon Multi-Asset Income, which aims to achieve a stable income with the potential for capital growth over the long term (five years or more) by investing in equities, bonds and alternatives. Almost 20% of the portfolio is in alternatives with specialist trusts in areas like wind, private equity, renewables and a music IP investment and song management company**.

Another option is the Aegon Diversified Monthly Income fund. manager Vincent McEntegart draws upon all Aegon’s investment capabilities to build this multi-asset portfolio using the most attractive income opportunities the team has identified. The fund targets an attractive yield of 5% by investing across corporate credit, sovereign debt, investment grade and high yield bonds, global equities, listed property, listed infrastructure and specialist income.

IFSL Wise Multi-Asset Growth fund holds almost 10% In private equity, having recently added the ICG Enterprise Trust, alongside existing holdings Pantheon International and Oakley Capital Investments. They also hold private equity exposure through non-dedicated private equity strategies, like Caledonia Investments. Manager Vincent Ropers says the asset class has been one of the biggest contributors in the 20-year life of the fund, adding that although valuations have improved in the past 12 months, they have only gone from “very cheap to cheap”.***

*Source: fund factsheet, 31 March 2024

**Source: fund factsheet, 31 May 2024

***Source: FundCalibre, April 2024

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views expressed are those of the author and fund managers and do not constitute financial advice.

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Manuela Willbold: Blogger and Educator by Passion | Senior Online Media & PR Strategist at ClickDo Ltd. | Contributor to many Education, Business & Lifestyle Blogs in the United Kingdom & Germany | Summer Course Student at the London School of Journalism and Course Instructor at the SeekaHost University.