This has been a relatively good year for investors, but lower returns are looming with central banks set to tighten monetary policies and even raise interest rates. And against this backdrop, asset managers believe that the case for multi-asset investing - putting together a diverse range of assets like stocks, bonds and cash to achieve a consistent return - is becoming more compelling, particularly for those looking for a stable source of income.
"As an investor, you have to do two things: You have to find things that you think have intrinsic value, and you have to think about what happens when you're wrong," Mr Talib Sheikh, portfolio manager for multi-asset solutions at JPMorgan Asset Management, said in an interview with The Sunday Times.
"The second part - what your first line of defence is when you're wrong - is perhaps more important, and certainly one of the benefits of being a multi-asset investor," he adds. "It's about portfolio construction, it's about diversification. It's about not having all your exposure in one single market, but making sure you are really spread across the globe, across capital structures, across asset classes."
In the light of the uncertainties that will accompany us into next year - where interest rates are going, the implications of the rate hikes, and how the correlation of bonds and equities is going to be - Mr Sheikh believes that diversification is going to be a key and stable driver for the long-term investor.
LOWER YIELDS AHEAD
"The return environment of the past 30 years has been a historical anomaly," Mr Mike O'Brien, global co-head of multi-asset solutions at JPMorgan Asset Management, told a conference in London recently.
"It was a golden age characterised by declining inflation, falling interest rates, strong global economic growth fuelled by demographics, productivity and rapid growth in China, and robust corporate profits boosted by access to new markets, low tax rates and the rise of automation and sophisticated supply chains," he noted.
But the next five or six years will see a world with "challenged market returns".
"We will have higher volatility, we will see lower correlation across stocks and sectors, and we will see the quantitative easing (policies) unwinding... I think the next 30 years will be more challenging as we enter the era of rising interest rates."
To illustrate his point, Mr O'Brien noted that a traditional investment portfolio from 15 years ago - made up of 60 per cent equities and 40 per cent bonds - would have come with an expected 10-year return of 7 per cent. But the same portfolio today would be expected to deliver a return of only 5 per cent in the next decade.
"Investor needs are changing as a result of the shifts in the macro environment," said Mr O'Brien, adding that clients are increasingly looking at multi-asset solutions as a means of active asset management.
Last year, 17 per cent of global asset flows were related to multi-asset strategies and funds, and JPMorgan Asset Management expects to see this grow between 15 and 20 per cent annually in the years ahead.
Interest in multi-asset funds has been on the rise in recent years. Mr Kelvin Tan, head of investment funds for DBS Bank, noted that the bank has seen assets under management in multi-asset funds balloon by more than 150 per cent over the last three years.
Mr Tan said investors are increasingly paying more attention to building sustainable, long-term portfolios, rather than just chasing the next thematic trend. "We feel that multi-asset strategies - comprising equities, fixed income, gold, cash, real estate investment trusts (Reits) and others - offer a one-stop solution for core portfolio construction. For many clients, this helps to free up precious time required to monitor and rebalance multiple investments using a traditional diversification strategy."
Notably, there has been a significant uptick in demand for multi-asset portfolios from retail investors, particularly in South-east Asia, according to Mr Rob Worthington, head of investment solutions specialists for Asia-Pacific at UBS Asset Management.
"Retail investors want either an investment solution that is 'outcome-orientated' by nature, or they want a one-stop investment solution that delivers a more stable investment experience through managing risk holistically, both across the portfolio and within individual asset classes."
Mr Worthington said single-strategy or single-asset-class funds continue to play an important part in many portfolios. Such strategies typically aim to provide a degree of outperformance versus their benchmark, and they "remain a very valid measure".
Multi-asset funds, on the other hand, aim to harness the best managers and add value by tilting the composition of the portfolio towards asset classes that look attractive, and away from those that are less so. "This delivers an additional return stream to clients above and beyond holding static weights to single-asset-class strategies," he said.
Mr Worthington added that there are various multi-asset strategies in the market. A traditional benchmark-orientated strategy, for instance, will generally aim to outperform a set benchmark, whereas an income strategy will try to provide an attractive distribution to clients.
"Multi-asset investing is all about outcomes. Does the client want to beat a benchmark or receive an attractive income? It is important to understand the outcome that each multi-asset portfolio is aiming to deliver."
STRATEGISING THE ASSET ALLOCATION GAME
In terms of asset allocation, DBS maintains a neutral stance on equities, although it is inclined towards Asian equities. Similarly, it holds an "overweight" call for fixed-income assets as a whole, but sees relative value in emerging market debt.
"As interest rates look increasingly likely to rise gradually, we prefer multi-asset funds that have the flexibility to allocate between fixed income and equities, and possessing a broader, global mandate," DBS' Mr Tan said.
For Ms Johanna Kyrklund, global head of multi-asset investments at Schroders, the focus now is still on generating returns while the going is good. But what is also key, she stresses, is the need to "remain alert to any sign that the benign backdrop may be changing".
In her latest report, Ms Kyrklund noted that the global economy is experiencing its most synchronised expansion since the global financial crisis. In tandem with the economic upswing, the outlook for corporate profits also appears favourable.
"This supports our positive view on equities and the stance we have taken via our exposure to emerging market assets. In fact, over the summer, we increased our cyclical exposure further through investments in US banks and US small caps that should benefit from any upside surprise from US fiscal policy."
On the other hand, Ms Kyrklund believes that investors are paying too high a price for growth stocks, which the asset manager is therefore avoiding. "Valuations on their own do not predict returns on a one-to three-year time horizon, but they are an important indicator of risk and probability of loss.
"So far valuations have been underpinned by low inflation and low interest rates," she adds.
Ms Kyrklund expects the process of monetary policy normalisation to be gradual, though she also notes that "the economic cycle is entering its later stages and we expect to become progressively more cautious in 2018".
"Given structurally lower expected returns on many asset classes, we are making increased use of alternatives to diversify our portfolios," she said.