Practical analysis for investment professionals
03 March 2015

Multi-Asset Strategies: A Primer

Multi-asset strategy is the latest name that the investment management industry has adopted for what has long been known as a balanced fund. Despite the fancy name, this is a subject that affects all investors. Whether you are an institutional manager running billions of dollars or just a retail investor looking after your own retirement portfolio, what we are about to discuss should be relevant to you in at least a few significant ways.

What Is a Multi-Asset Strategy?

Multi-asset strategy refers to the type of investment strategy that involves investing in various asset classes. Typically, this is a strategy that employs an asset allocation program on top of the sub-strategies that invest in individual asset classes.

I’ve intentionally made the above definition very flexible to encompass all the possible scenarios that are highlighted below.

What Are the Main Categories of Multi-Asset Strategies?

The old balanced funds were typically put together by combining a (core) stock fund and a (core) bond fund with some cash as a cushion. Over time, core stock and bond funds evolved into funds of multiple (sub-) asset classes. A balanced fund made up of such stock and bond funds, each specializing in one segment of the market, should really be called an asset allocation fund, although in most cases they simply kept the old balanced fund moniker.

In recent years, these products are increasingly sold under the multi-asset strategy name. Often they adopt a tactical asset allocation program, which was rare prior to the global financial crisis.

There is a unique category of multi-asset strategy fund worth mentioning: strategies that intentionally cover only a limited segment of the entire universe. This “limited” segment can be anything — for example, alternatives, international, or growth equities.

The very popular target-date fund is also a type of multi-asset strategy. The difference from a typical multi-asset strategy fund is that target date funds have an asset allocation that varies with time, or the “target date” of withdrawal.

What Are the Common Sub-Asset Classes Included in Multi-Asset Strategies?

The four “main” asset classes are stocks, bonds, alternatives, and cash. Within each there are multiple ways of slicing and dicing them.

Stock funds can be managed according to size (large-, mid-, small-, and micro-cap), style (growth and value), sector (consumer, financials, health care, industrials, technology, etc.), and geography (Asia, Europe, Latin America, Japan, BRIC, etc.).

Bond funds can be managed according to duration (long, intermediate, and short term), credit (core, government, credit, high yield, etc.), geography (global, United States, emerging markets, etc.), and currency (US dollar, euro, and local currency).

Alternatives include various hedge strategies, infrastructure, private equity, and real estate, many of which are common in institutional multi-asset strategies. Retail programs generally cannot include many types of alternatives due to liquidity and regulatory constraints.

Who Uses These Products and for What?

Asset owners such as pension funds and insurance companies are the main investors in multi-asset strategies. Individual investors often use them in their defined contribution plans, among other things.

Multi-asset strategy came into existence for two reasons. First, partly driven by demand for product differentiation, the number of asset classes has exploded over recent decades since the initial proliferation of the product category. Second, tactical asset allocation came into fashion after the global financial crisis and the name — multi-asset strategy — partly implies (accurately or inaccurately) more flexibility on the asset allocation component in these strategies.

Who Produces These Products?

They are generally offered by asset management firms. Some asset owners are both producers and users as they manage the assets in house. This could include insurance companies and various types of pension funds. Many asset owners do hire consulting firms to manage the multi-asset strategy products for them. The consultants generally develop and implement asset allocation programs and then select appropriate asset managers to implement them.

What Are the Skills Required to Make a Multi-Asset Strategy Product Successful?

Multi-asset strategies are the decathlons of the investment industry. They require practically all the investment skills one can think of, from securities selection at the individual asset class level to asset allocation at the overall level. Among all the multi-asset strategy products I have come across, the vast majority are managed by multiple teams as it is indeed rare to be able to find all the required skills in one place, especially in today’s world where investment talent has become highly specialized.

Managing a multi-asset strategy portfolio is much more complicated than putting together a puzzle. We’ll publish a series of blog posts sharing insights from some of the largest and most sophisticated investment managers on each of the crucial aspects:

  1. Formulating an asset allocation strategy.
  2. Constructing the portfolio.
  3. Measuring performance.

Stay tuned.

For more in-depth coverage of these topics, Multi-Asset Strategies: The Future of Investment Management is available to CFA Institute members. 

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

Image credit: ©iStockPhoto.com/kmlmtz66

About the Author(s)
Larry Cao, CFA

Larry Cao, CFA, director of industry research, CFA Institute, conducts original research with a focus on the investment industry trends and investment expertise. His current research interests include multi-asset strategies and FinTech (including AI, big data, and blockchain). He has led the development of such popular publications as FinTech 2017: China, Asia and Beyond, FinTech 2018: The Asia Pacific Edition, and Multi-Asset Strategies: The Future of Investment Management and is a frequent speaker at industry conferences on these topics. During his time in Boston pursuing graduate studies at Harvard and as a visiting scholar at MIT, he also co-authored a research paper with Nobel laureate Franco Modigliani that was published in the Journal of Economic Literature by American Economic Association. Larry has more than 20 years of experience in the investment industry. Prior to joining CFA Institute, Larry worked at HSBC as senior manager for the Asia Pacific region. He started his career at the People’s Bank of China as a USD fixed-income portfolio manager. He also worked for US asset managers Munder Capital Management, managing US and international equity portfolios, and Morningstar/Ibbotson Associates, managing multi-asset investment programs for a global financial institution clientele. Larry has been interviewed by a wide range of business media, such as Bloomberg, CNN, the Financial Times, South China Morning Post and the Wall Street Journal.

14 thoughts on “Multi-Asset Strategies: A Primer”

  1. Ashok says:

    Very well explained. Looking forward to the series.

  2. MB says:

    Thanks. Next chapter is highly anticipated

  3. Isom says:

    Excellent insight…waiting impatiently for the entire series.

  4. Brad Case, PhD, CFA, CAIA says:

    CEM Benchmarking last year published a study, sponsored by NAREIT (my employer) that analyzed the actual investment results achieved by more than 300 U.S. pension funds. For that study they carefully grouped investments in 186 different asset categories into 12 broad asset classes, similar within each class but different across them. The study is available for download at https://www.reit.com/investing/industry-data-research/research/cem-benchmarking-defined-benefit-pension-fund-research.

    With respect to tactical asset allocation (TAA) strategies, here’s what CEM Benchmarking found:

    “Hedge funds and TAA programs are all highly correlated (rho~0.9 on average), and display moderate excess returns, to U.S. stocks, large and small cap. … External active TAA programs, hedge funds, and hedge funds-of-funds…have low betas with respect to U.S. stock and are highly similar in their performance, allowing for aggregation that does not bias our results. We include all…in one aggregate asset class called TAA/hedge funds.”

    With respect to performance, CEM Benchmarking found that the TAA/hedge fund asset class was the WORST performer over the 14-year available historical period (1998-2011), with actual net returns averaging just 4.77% per year–worse than all four categories of fixed income, all three categories of stock, and all three categories of real assets as well as private equity. In terms of gross returns, TAA/hedge funds beat out only one category of fixed income, but investment costs averaging 125.1 basis points per year (second only to private equity) pulled them into solid possession of last place.

    I, too, look forward to the rest of the series, and hope that you’ll address why anybody would invest in the institutional, DB-oriented version of these products when their performance has been so consistently terrible for such a long time. Thanks!

    1. Larry Cao, CFA says:

      Brad,

      Thanks for visiting our blog! We’ll share insights on benchmarking from some of the leading practitioners in the fourth piece of this series.

      And your question on why people invest in under-performing products is fascinating. It ties into some of the fundamental questions we face as an industry, such as what value does the investment management industry as a whole add? We’ll be sharing more of our thinking on the subject in the future and looking forward to your continued engagement as well.

      Warm regards,
      Larry

  5. Joseph says:

    This over complicates things; keep it simple. Use four equally allocated asset classes; stocks, bonds, cash and gold. Rebalance at 35/15% thresholds. An allocation from cradle to grave.

    1. Larry Cao, CFA says:

      Joseph,

      You’ve sure got a catchy phrase there. But why stop at four? Why not two? My colleague Lauren Foster wrote about Warren Buffet’s two-asset class recommendation for his wife’s retirement portfolio. Read all about it here:

      http://blogs.cfainstitute.org/investor/2014/03/04/warren-buffetts-90-10-rule-of-thumb-for-retirement-investing/.

      Thank you for visiting our blog!

      Larry

      Warm regards,
      Larry

  6. Larry Cao, CFA says:

    Ashok, MB and Isom,

    Many thanks for visiting our blog! We go beyond the basics in the rest of the series and share insights from some of the most sophisticated institutional investors on the subject, so stay tuned.

    Warm regards,
    Larry

  7. Yasir says:

    Highly rated one

    1. Larry Cao, CFA says:

      Yasir,

      Thank you for your kind words. Stay tuned for more insights on the subject from the industry’s leading practitioners.

      Warm regards,
      Larry

  8. Arkadiusz says:

    I would just add that “target maturity” funds have become increasingly popular in recent years(for example in countries like Spain) and are systematically gaining followers. They are a good solution for investors who want to contribute to their pension whose risk tolerance naturally decreases as they approach retirement. The percentage of equities in the portfolio tends to be very high at the beggining and slowly decreases giving way to less risky securities like bonds as the fund approaches its maturity,

    1. Larry Cao, CFA says:

      Dear Arkadiusz

      Thanks for visiting our blog and leave a comment! You are quite right about the development in target maturity funds. In fact, “target maturity” is just another term people use for “target date” funds that we referred in this post. Although they typically start with high allocations to equity in your youth and get more conservative as you age, it does not have to be that way. Check out this Weekend Reads where we listed a few articles that tested an alternative strategy that worked just well.
      Warm regards,
      Larry

  9. Rahul says:

    Thanks for this article. Got a good idea about Multi-asset strategy. Thanks.

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