Investors’ needs are evolving
While many investors have been satisfied with their portfolios’ levels of risk and return in recent years, times are changing. They soon may see somewhat faster economic growth, a reversal – even if slow – in the 38-year trend of declining inflation and interest rates, and lower overall expected portfolio returns. Investors stand to benefit from holding diversified liquid alternatives measured by total return objectives to complement traditional relative return strategic benchmarks. Total return strategies offer low correlations to relative return strategic benchmarks and can add alpha in both de-risking and re-risking markets through a dynamic approach designed to navigate changing landscapes.
As returns from strategic targets fall short of constituents’ needs in a lower return world – even when accompanied by a traditional quantum of alpha – the need for strategies focused on delivering acceptable risk/return outcomes will become more important. For many years, qualified investors turned to hedge funds as a non-benchmarked total return allocation. In recent years, however, hedge funds have struggled with disappointing performance, uneconomic pricing, governance challenges (particularly for public funds), and a general lack of transparency. While private assets are the refuge of the day, many investors also are looking for liquid alternative strategies, such as multi-asset, which manage dynamically to outcome-based objectives that can generate superior returns at a lower cost, and with greater alignment and higher transparency. Indeed, investors can use multi-asset strategies within their portfolios to provide solutions to many of the issues they face. Multi-asset strategies may offer the potential for:
•Meeting absolute or total return objectives, such as outperforming Libor or the Consumer Price Index (CPI) over given periods
•Downside protection and lower volatility
•Providing diversified sources of sustainable alpha at a lower cost, consistent with today’s need for good governance and transparency
•Offering access to a wide range of asset classes that are dynamically managed across market cycles
Like hedge funds, multi-asset strategies represent a talent pool, not an asset class. Yet, in their entirety, multi-asset objectives arguably are more closely aligned with most investors’ objectives. An array of multi-asset strategies has emerged to play diverse roles in investor portfolios.
Multi-asset strategies can play different roles in a portfolio
Generally, multi-asset strategies can be categorized in three ways:
- Alternatives to growth assets. These strategies seek equity-like returns, but with lower risk. These are generally total return strategies that aim to deliver a return equal to the Consumer Price Index plus 5%-6%by making opportunistic investments across a wide array of asset classes.
- New strategic mixes. This broad segment of strategies includes replacements to traditional 60% equity/40%bond portfolios. The strategies, which include risk parity, risk factor parity, and diversified growth, lie between alternatives to growth and capital preservation categories. The focus here is predominantly on new strategic allocations that are not correlated with the investor’s overall strategic mix. Nuanced asset class or risk factor additions seek overall risk reduction for the portfolio while providing exposures that would be difficult to obtain otherwise for a traditional investor.
- Alternatives to capital preservation assets. These are strategies where the focus is more on risk than on return, and where risks generally do not exceed those of fixed income broadly. Here, managers seek to reduce interest rate sensitivity and outperform in a rising-rate environment.
All three types of multi-asset strategies are liquid alternatives that offer not only improved diversification benefits, but also improved return prospects. When blended effectively, they may contribute even more to an investor’s portfolio than would a single strategy.
The PineBridge Global Dynamic Asset Allocation Strategy (GDAA) is an alternative to growth assets and can help investors address a wide variety of challenges – an advantage we believe will be key in the new market regime.
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