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Multi-asset funds offer 'all-in-one solutions'

In the latest in our series on fund managers and market experts, Aberdeen Asset Management's Irene Goh explains the appeal and suitability of investing in non-traditional assets to help investors lower risk and generate sustainable income, even in uncertain market conditions.

Ms Irene Goh, head of Aberdeen's multi-asset solutions team in Asia-Pacific, said that by making broader use of the asset classes available, Aberdeen builds its funds to meet investment goals and withstand external shocks.
Ms Irene Goh, head of Aberdeen's multi-asset solutions team in Asia-Pacific, said that by making broader use of the asset classes available, Aberdeen builds its funds to meet investment goals and withstand external shocks. ST PHOTO: LIM SIN THAI

Ms Irene Goh heads Aberdeen's multi-asset solutions team in Asia-Pacific. Her career spans more than two decades of managing multi-asset investments as part of a sovereign wealth fund, asset management and private wealth firms.

Q What is the attraction of multi-asset investing?

A It is the ability to combine a range of asset classes with different and largely independent economic drivers in order to achieve consistent return and reduce downside risk.

Years of central bank intervention in markets have depressed interest rates and left investors hunting for reliable yield. More asset classes beyond traditional equities and bonds have become more accessible in the past decade.

But identifying which ones offer long-term potential at acceptable levels of risk takes experience, good judgment and extensive resources. Every new investment adds complexity. In this way, multi-asset funds provide a way for investors to diversify while keeping things simple in a single portfolio.

Q What styles of multi-asset investing are available in the market? What differentiates Aberdeen's approach?

A Some multi-asset investors seek to time the markets aggressively, while others use hedge fund techniques to invest in complex derivatives. Both rely heavily on manager skill.

We believe a better starting point is genuine diversification. Many multi-asset funds claim to be diversified, but look closely and you will see their portfolios offer a basic mix of equities, bonds and cash. We spread our investments in up to 25 asset classes and invest directly across developed and emerging markets, traditional and higher yielding fixed-income and alternative investments.

By making broader use of the asset classes available, we build our funds to meet their investment goals and withstand external shocks. As such, investors tend to use them as all-in-one solutions.

Q What is the composition of your multi-asset portfolios?

A Our largest exposure is to global equities, and for that, we use smart-beta strategies. These are rules-based index approaches designed to isolate factors behind market outperformance, such as volatility or value, and invest in stocks that provide them.

For the remainder, we favour assets with low or even negative correlation to equities. This includes high-yield bonds, emerging market debt, real assets such as infrastructure and insurance-linked securities (also known as catastrophe bonds).

More recently, we added peer-to-peer lending, mortgage and corporate funds that offer excess return over corporate bonds for a similar level of risk, litigation financing and credit funds. The world's largest institutional investors have already diversified into these assets. Now, smaller institutions and individual investors can too, through our multi-asset strategies.

Q What is the difference between your income and growth strategies?

A They both follow the same philosophy: a genuinely diversified portfolio managed flexibly to respond to the changing environment and not constrained by any benchmark. Our income strategy has a heavier weighting to the likes of emerging market bonds and asset-backed securities that generate consistent and reliable income.

We have more freedom to generate performance in the growth strategy because there is no income requirement. This allows us to allocate to absolute-return strategies, for example, which aim to generate a positive return in any market environment.

Our growth strategy aims to deliver returns with a far lower volatility in returns than equities. Our income strategy aims for a stable yield, with some upside growth potential as well as capital protection. These long-term objectives are a key part of how we think about managing our portfolios. We know investors are looking for either consistent growth or reliable and stable income. Our focus is to deliver on those.

Q How are your portfolios positioned at present?

A We are finally seeing some momentum in the global economy, with growth stirring in Europe after years of austerity and a cyclical upswing in Asia as China steadies. Hence our allocation to global equities.

We have raised our exposure to emerging market bonds in local currencies, which offer attractive yields determined more by domestic factors - making them lowly correlated to global markets.

Both strategies invest in liquid investment instruments - ones that are readily tradable to buy into and sell out of - which enables us to rebalance our portfolios as opportunities change. Although we do strive to add value through shorter-term, tactical allocation decisions, in practice, we build portfolios that can navigate a range of environments as opposed to trying to time the markets.

Q What are your biggest concerns and how will you deal with them?

A Today's conundrum is what happens if interest rates continue their upward trajectory. Money has been almost free for several years and we don't know how far that has distorted asset prices.

Our base case is that the United States Federal Reserve will continue its cautious policy tightening, even though incomes have stayed worryingly flat. Any relapse in activities, given the build-up in borrowing, would have knock-on effects globally.

Dollar debt issuance in Asia has surged over the past few years, led by China. Meanwhile, Beijing is embarking on a recapitalisation of its shadow banking system, which is positive. The challenge is for that to happen without hurting credit demand and hence economic growth. There are also geopolitical issues surrounding North Korea, political uncertainties in Europe and a threat to free trade under US President Donald Trump.

However, we believe our approach of seeking genuine diversification by investing across liquid assets with very low, or negative, correlations to one another will help investors ride these risks through lower portfolio volatility and protection in times of stress.

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A version of this article appeared in the print edition of The Sunday Times on September 10, 2017, with the headline Multi-asset funds offer 'all-in-one solutions'. Subscribe