MULTI-ASSET STRATEGIES –
REDEFINING THE UNIVERSE
APRIL 2014
INTRODUCTION
Loved by many, reviled by others, multi-asset strategies are undeniably a key feature of the investment
landscape. In the US they are typically known as balanced strategies; in Europe and other parts of the
world investors have been enticed by a category of investments known as “diversified growth funds”.
Whatever the label, however, the variety of strategies is broadening across the globe.
We believe that this represents an opportune time to revisit the way we categorise the various
strategies within the multi-asset universe. We currently track over 300 strategies within the two major
sub-categories of multi-asset investment (global balanced and diversified growth funds). We are
redefining these product groups to better reflect the characteristics of the underlying strategies and
the role that we believe that they could play in an investor’s portfolio. In future, we will categorise
these strategies in one of two ways:
•
•
Core Diversified Growth / Global Balanced
Idiosyncratic Diversified Growth
We believe that these categories will better able us to identify the most suitable products for our
clients, as well as capture the broadening opportunity set we see emerging, particularly at the
idiosyncratic end of the spectrum.
FOCUSING ON THE KEY CHARACTERISTICS
Multi-asset strategies have seen a surge in popularity over recent years. Indeed, in the UK, for
example, multi-asset strategies have been the most searched for new mandate in our search trends
analysis for each of the last three years. Liquidity, simplicity and relatively low fees have made them
attractive components of defined contribution pension schemes as well as appealing to smaller
institutional investors where governance issues are a key consideration. These products have also
found favour from larger institutional investors, particularly where they can demonstrate a
diversification benefit within the broader asset mix1.
While investors appear to have rekindled their desire for multi-asset strategies, product providers have
also been looking to both innovate and to also move into new markets. The old labelling of balanced in
the US and diversified growth in the UK is becoming redundant. Moreover, the range of strategies
available to investors is increasing - and, in particular, pushing the boundary between traditional and
hedge fund investments in the liquid alternatives space. This offers investors access to strategies with
greater potential to diversify traditional beta portfolios, although these strategies also come with
greater manager risk with which investors need to be comfortable.
As we stand back and look at our universe of managers in these categories, we believe that it is
important for both the sources of risk and return in these products to be made clear, as well as the
potential role that they could play in an investment portfolio.
As such, we are restructuring our manager universe to include two key categories: Core Diversified
Growth / Global Balanced and Idiosyncratic Diversified Growth2. The table on the following
page summarises how we visualise the types of strategy within each grouping (please see Appendix A
for more comments on the various sources of growth and defence).
1 They have also been used, for example, as liquidity buffers within a broader alternative or growth portfolio, helping investors meet short-term
cash-flow requirements while providing exposure to a broad mix of more traditional growth assets.
2 We will also retain smaller universes of “diversified inflation” and “diversified beta” – the latter of which we will rename “Risk Parity”.
1
Core
Diversified
Growth /
Global
Balanced
In a nutshell
Key sources of
absolute growth
Key sources of
defence
Possible portfolio
role
•
The key drivers of returns
will be those achieved by
investment markets
(beta)
Will generally be more
correlated with equity
market movements than
idiosyncratic funds
Will typically hold a core
of direct stock and bond
exposures (including via
in-house and/or third
party funds) rather than
derivatives-based
exposures
•
Traditional beta
(equity and credit)
Exotic beta (such
as emerging
market debt and
high yield bonds)
Some dynamic
asset allocation,
although this will
be a smaller
component of
total returns than
idiosyncratic
Diversified Growth
funds
•
Underpinned by a
long-term /
strategic asset
allocation
Diversification
across assets
Some dynamic
asset allocation,
although this will
be a smaller
component of
total returns than
idiosyncratic
Diversified Growth
funds
•
Although the funds will
have some beta
exposures, more active
and non-directional
exposures will also be
significant components
and returns are expected
to be more “absolute
return” in nature
Will generally be less
correlated with equity
market movements than
core funds
Derivatives will often be
used to implement ideas.
•
Tactical or
dynamic allocation
across broad
markets
Idiosyncratic trade
ideas (single stock
trade ideas,
relative value
opportunities)
•
Tactical or
dynamic allocation
across broad
markets
Indirect hedges to
balance out the
portfolio
•
•
•
Idiosyncratic
Diversified
Growth
•
•
•
•
•
•
•
•
•
•
•
Core defined
contribution fund
holding
Low governance
all-in-one growth
portfolio
Satellite to a core
Diversified Growth
/ Global Balanced
Liquid diversifier
within broader
investment
portfolios
Because they are focused on earning returns from beta, Core Diversified Growth / Global Balanced
strategies are likely to be suitable investment options for defined contribution clients (or where the
end investor is an individual). These strategies may experience periods of loss as a result of a long
term underlying asset allocation mix (either as a result of a formal benchmark, or driven by long-term
strategic asset assumptions). They will seek to add value through, for example, exotic credit exposures
and allocations to alternative investment funds (e.g. listed private market investments or hedge funds
etc.)
Idiosyncratic Diversified Growth funds include multi-asset strategies that have a predominant longbias, but limited recourse to a long-term asset allocation mix and a greater emphasis on downside
protection via tactical/dynamic asset allocation and idiosyncratic trade ideas. While they will seek to
provide more downside protection when equity markets fall, they also risk lagging strong bull markets
during which their more alpha-driven trade ideas are unlikely to deliver as much return as a beta-heavy
Diversified Growth funds or indeed a 60/40 portfolio. Ultimately the sources of return should be
differentiated from traditional beta, such that they can add diversification to a traditional asset mix .
Individual manager risk will, however, be higher than for a Core strategy.
3 We note that, although multi-asset, these strategies do not provide full access to the broad range of diversifying growth strategies that can be
accessed by institutional investors; while we believe that they can fulfil a valuable role, they should not be seen as a complete solution, particularly
by larger investors.
2
While any form of categorisation has its challenges (and we stress that even across these buckets there
is a continuum of styles), this refocusing of our multi-asset universe will provide a greater sense of
direction. We also believe that it will enable us to better capture the range of new strategies emerging
at the more exotic end of the multi-asset spectrum.
MANAGER EXAMPLES
We can illustrate the differences between managers that we would consider core, from those that are
more idiosyncratic (more exotic), by plotting the strength of bias towards different factors. In the
table above, we reference the key sources of growth and defence used by managers in each product
group. The radar charts below provide more granular examples of two of our highly rated managers –
one in the core universe; the other more idiosyncratic. The further a marker is towards the outside of
the chart, the more significant the bias4.
Core Diversified Growth /
Global Balanced
Alternatives funds/ Risk
Premia
Growth Seeking
Tactical/Dynamic Asset
Allocation
Exotic credit
Traditional beta
Idiosyncratic trades
Indirect Hedges
SAA underpin
Idiosyncratic
Diversified Growth
Alternatives funds/ Risk
Premia
Growth Seeking
Tactical/Dynamic Asset
Allocation
Exotic credit
Traditional beta
Idiosyncratic trades
Indirect Hedges
SAA underpin
Defensive
Defensive
Tactical/Dynamic Asset
Allocation
Diversification
Derivatives Hedges
Tactical/Dynamic Asset
Allocation
Diversification
Derivatives Hedges
Strategies with a map that bulges to the left hand side (such as the manager represented in the lefthand chart) can be regarded as “Core Diversified Growth / Global Balanced”; those that tilt to the
right hand side (such as that shown in the right-hand chart) we are classifying as “Idiosyncratic
Diversified Growth”. The strength of bias is qualitatively assessed by Mercer as part of our manager
research activities (further details are provided in the Appendix).
As can be seen, some characteristics (such as the use of alternative risk premia or listed alternative
funds) are, we believe, common to both styles of management.
CONCLUSION
Multi asset strategies continue to gain popularity and we believe that this will continue - both with
respect to core strategies, that can help add balance to small investment plans or defined contribution
plans, as well as more idiosyncratic investments, that can provide greater diversification (albeit with
greater use of non-traditional return sources).
The changes we are making to our manager universe reflect the globalisation of the product offerings
available and the innovation we have seen, particularly at the idiosyncratic end of the spectrum.
Through our specialist manager research we believe that we can identify the most compelling
opportunities across this range of approaches - we will continue to work closely with clients to identify
the most suitable strategies to meet their specific investment needs.
4 The strength of bias is qualitatively assessed by Mercer as part of our manager research activities.
The instruments and drivers of return will vary
over time – these charts are no more than an illustration of Mercer’s own view of these strategies, all else equal.
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APPENDIX
FACTORS SHOWN IN THE RADAR CHARTS
The radar chart below shows the biases (qualitatively assessed by Mercer) for one of our highly rated
Core Diversified Growth / Global Balanced strategies when it comes to (1) seeking growth and (2)
introducing more defensive characteristics. The further a marker is towards the outside of the chart,
the more significant the bias.
Core Diversified Growth /
Global Balanced
Alternatives funds/ Risk
Premia
Growth Seeking
Tactical/Dynamic Asset
Allocation
Exotic credit
Traditional beta
Idiosyncratic trades
Indirect Hedges
SAA underpin
Defensive
Tactical/Dynamic Asset
Allocation
Diversification
Derivatives Hedges
Growth seeking approaches can be defined as: Traditional Beta (to what extent is the long-term
exposure to equity, for example, seen as a core component of long-term returns); similarly for Exotic
Credit, including the use of EMD, High Yield and Convertibles for example. Alternative Funds / Risk
Premia include fund investments (or similar) to hedge funds, real assets (commodities, property,
infrastructure etc) and other alternative asset classes. Idiosyncratic Trades include, for example,
specific active currency positions, bottom up security selection or specific macro trades. Tactical/
Dynamic Asset Allocation refers to the use of tactical/dynamic changes in the broad asset allocation
to drive the portfolio performance.
Defensive approaches reflect the manager’s bias to different techniques to help manage the “risk” in
the strategy – what do they fall back on in periods of challenge. For many, the underpin to their
investments (and what they might seek solace in during shorter-term periods of absolute loss) is a
strategic asset allocation (an SAA underpin) – either an explicit beta benchmark or a long-term
strategic asset mix (formal or informal).
In addition, the charts highlight the manager’s focus on Diversification across asset classes or
specific trades and the use of Derivative Hedges (for example option overlays to protect the
portfolio). The use of Indirect Hedges in portfolio construction includes (typically) long positions to
balance the portfolio (for example the use of gold in portfolios post 2008). Finally Tactical/Dynamic
Asset Allocation is considered for its potential to protect the portfolio, as well as to seek out growth
opportunities.
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