Expert Advice on Building an Effective Multi-Asset Portfolio

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How can investors create an effective multi-asset investment strategy amidst market volatility? This question has been on the minds of discerning investors looking to weather the storm during volatile times.

 

“An effective multi-asset strategy is about selecting a combination of different assets that can best sustainably protect and grow a portfolio under various market conditions over a target time horizon and desired risk tolerance,” explains WMI’s faculty member Dr Aaron Low, CEO of wealth platform Lumiq.

 

“Traditionally, these asset classes can include equities (stocks), fixed-income securities such as bonds, real estate investment trusts (REITs), commodities, and alternative investments – such as hedge funds, private equity, venture capital, and on.”

 

Prior to heading Lumiq, Aaron was Head of Asia Ex-Japan at PIMCO, where he oversaw Asia investment strategies and managed global and emerging market bond portfolios. He was also the global Chairman of the Board of Governors of CFA Institute. Based on his wealth of experience, including his previous role as Head of Investments, Asia, at Allianz GI, he shares with us some strategies to navigate market volatility and build a resilient portfolio.

 

Aaron explains that it “involves diversification across various asset classes, including both liquid transparent public markets and alternative assets, to reduce risk and capture growth from different economic sectors and geographical areas.”

 

The allocation to each asset class within the portfolio may vary based on factors such as investment goals, risk tolerance, time horizon, and market conditions. For example, in response to the prevailing expectation among most family offices of sustained positive US real interest rates, the allocation to developed market bonds increased to 16% in 2023 from 12% in 2022, according to UBS Global Family Office Report 2024.

 

However, the core theme is ties back to diversification; reducing overall risk and potentially improving returns by spreading investments across different asset classes that may perform differently under various market conditions. Family offices are looking beyond traditional asset classes, such as private equity and venture capital, toward other types of alternatives. Private debt grew from 8.3 per cent of family office fund searches in 2022 to 12.4 per cent in 2023, hedge funds from 5 per cent to 10.7 per cent, real estate from 13.2 per cent to 18.4 per cent, and infrastructure from 1.7 to 3.2 per cent, a Preqin Report reveals.

 

Aaron believes that when building a multi-asset portfolio, adaptability, picking quality investments, and having a long-term perspective would provide longevity and increase opportunities for returns. Here are his recommendations:

 

  • Balance public and private market investments to mitigate volatility risks
    Diversify public market offerings such as stocks, bonds, and commodities to help mitigate risks associated with market volatility. It’s crucial to balance between equities for growth and fixed-income securities for stability. At the same time, investments in private equity, private debt, real estate, and infrastructure should be added to offer higher potential returns and lower correlation with public markets, providing a cushion during periods of volatility.
  • Asset allocation and portfolio rebalancing based on long-term goals
    Establish long-term investment goals and allocate assets accordingly, adjusting for risk tolerance, investment horizon, and financial objectives. This strategy involves periodically rebalancing the portfolio to optimise the desired asset allocation.
  • Tactical asset allocation
    This involves taking advantage of short-term market movements to enhance returns or mitigate risks. It requires a more active management approach, adjusting exposures to different asset classes based on market conditions and forecasts.
  • Risk management
    Implement strategies to manage risk, such as using derivatives for hedging, employing stop-loss orders, and setting limits on portfolio exposure to specific sectors or regions.
  • Liquidity management
    Ensure there is enough liquidity in the portfolio to meet short-term obligations and take advantage of investment opportunities as they arise. This might mean keeping a portion of the portfolio in cash or in highly liquid securities.

 

Never stop evolving your strategies

Aaron also recommends proactive learning and research to elevate multi-asset portfolios. “By embracing new markets, technologies, and analytical methods, investors can construct more resilient multi-asset portfolios capable of navigating complex market environments,” he said. Some of his newer themes include:

 

  • Factor investing
    Factor investing involves targeting specific drivers of return across asset classes, such as value, momentum, size, and quality to break out of traditional categorisation.
  • Alternative risk premia
    This approach seeks to capture returns from a broad range of risk premia beyond traditional equity and fixed income markets. It includes strategies like volatility harvesting, merger arbitrage, and trend following; with an aim to provide uncorrelated returns.
  • Digital assets and cryptocurrencies
    Incorporating digital assets such as cryptocurrencies into a multi-asset portfolio can offer a new dimension of diversification. Their volatility and low correlation with traditional assets, though risky, can be an unexpected buffer in some crises.
  • Thematic and impact investing
    Investing in themes or impact-driven opportunities, such as sustainable energy, technology advancements, healthcare innovation, and social governance factors, can provide growth opportunities.
  • Quantitative strategies and Machine Learning
    Using advanced quantitative strategies and machine learning algorithms can help identify non-obvious correlations, diversification opportunities, while managing risks across a global investment set.
  • Integrated ESG approaches
    Incorporating Environmental, Social, and Governance (ESG) criteria into investment analysis and decisions across all asset classes. This not only addresses risk management from a broader perspective but also aligns investments with longer-term sustainability trends.

 

 

Overcoming challenges to a successful multi-asset portfolio

According to Aaron, the top themes to watch for are changes in market regimes in risks (market volatility) and contagion (asset correlation) from geo-political uncertainties, monetary policy shifts. and AI impact. He suggests expanding diversification and “consider using derivatives for hedging against short-term risks”, while also adding non-traditional asset classes to lower the risk of the latter.

 

He also highlights liquidity concerns with certain assets, which can affect strategy mobility and that with a more dynamic portfolio, one may also face higher fees in active monitoring and maintenance. Shifting regulatory and tax responsibilities may also add to the consideration of which assets to work with.

 

The good news is that some of the challenges can fortify your strategies as well. With the evolution and improvement technology, innovation and data analysis that can help with better portfolio management, while driving positive trends in certain assets.

 

Conclusion

To sum up, having an agile approach to asset management is the most nimble way to navigate uncertain waters. Whether you are an asset allocator, portfolio manager, investment specialist, wealth advisor or family office professional, WMI’s Certificate in Multi-Asset Investing will enrich financial investors with established yet forward-looking strategies from an expert faculty.

 

“The goal is to construct a portfolio that is not only aligned with the investor’s risk tolerance and investment objectives but also resilient against market turbulence and capable of delivering consistent long-term returns,” he adds.

 

Learn more about WMI’s Certificate in Multi-Asset Investing

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