Why is the Multi-Asset Portfolio so Popular?

The rise of the Multi-Asset Portfolio can be traced back to the Global Financial Crisis (GFC) in 2008, when many investors “grew disenchanted with the long-time investment mantra that equities were the one true way to wealth. That smug bromide rang hollow when the financial crisis slashed many stock portfolios in half”, according to recent Chief Investment Office (CIO) article, How Multi-Asset Investing Became So Popular.

Following the GFC, the mantra became diversify your holdings. As a result, Multi-Asset Portfolios, which combine equities, fixed income, and an array of other assets, gained greater prominence.

Multi-Asset Portfolios grew more popular on promises of greater capital preservation and sometimes the delivery of superior returns.

As CIO note, the increased prominence of the Multi-Asset Portfolio can be attributed to David Swensen, Yale’s investment chief since 1986. Yale has generated an impressive performance record by investing outside of just equities and fixed income. Their portfolio has included high allocations to private equity, real estate, and other non-traditional assets. (For more on the success of the Endowment model and the fee debate please see this Post.)


The CIO article also noted that Multi-Asset Portfolios are most prominent among target-date funds (TDFs), which have become the default offering among 401(k) plans (e.g. US superannuation schemes such as KiwiSaver in New Zealand).

“TDFs have grown five-fold since the financial crisis, reaching $1.09 trillion in 2018, a Morningstar report concluded, with an estimated $40 billion added last year.”


The Concept: Absolute returns and better risk management

The Multi-Asset Portfolio is based on the concept of absolute returns, where the focus is on generating a more targeted and less volatile investment return outcome. There is a greater focus on risk management relative to that undertaken within a traditional portfolio. The intensity and sophistication of risk management employed depends on the type of absolute return strategy.

The absolute return universe is very broad, ranging from Multi-Asset Portfolios to those with a much greater focus on absolute returns such as the plethora of Hedge Fund strategies, including Risk Parity as discussed in the CIO article.

This contrasts with the traditional balanced fund, which are generally less diversified, portfolio risk is dominated by the equity exposures, and returns are much more subject to the vagaries of investment markets. The management of risk is more focused on relative returns i.e. how performance goes relative to a market benchmark, rather than returns relative to an absolute return outcome.

A Multi-Asset Portfolio generally has more of an absolute return focus than a Traditional Portfolio. It achieves this by having a more truly diversified portfolio, moving beyond the traditional Balanced Portfolio (60% equities and 40% Fixed Income), to incorporate a greater array of different investment strategies and risk management approaches within the portfolio.

As the CIO article comments, “There’s a strong argument for Swensen-like multi-asset funds that range beyond stocks and bonds, adding solid helpings of commodities, real estate and all kinds of other asset classes. With such an array, the thinking goes, you’re best protected when recessions thunder in.”


Return Expectations

The CIO article made the following observation, Multi-Assets Portfolios are “expected to return 4.5% annually through 2024, according to Casey Quirk, an arm of Deloitte Consulting. That isn’t a daunting growth rate, but the figure should have a decent chance of holding steady, while public markets lurch around, especially in the next recession.”

To put this into perspective, a recent CFA Institute article estimated that a Balanced Portfolio will return 3.1% over the next 10 years.

It is highly likely we are heading into a “Low Return Environment”.


As a result, a different investment approach to that which has been successful over the last 20-30 years is likely needed to invest successfully in what is expected to be a Challenging Investment Environment.

As the CIO article notes, “But multi-asset now goes far beyond the simple stock-bond duality, which seems insufficient to deliver the best diversification. The most salient problem with the basic pairing nowadays is that bonds are paying low interest rates. Their ability to score capital gains is limited because rates don’t have much left to fall before they hit zero. “These don’t work as well as they used to,” observed Deepak Puri, CIO Americas for Deutsche Bank Wealth Management.”


I fear the lessons from the GFC and 2000 Tech Bubble are fading from the collective memory, as equity markets reach historical highs and investors chase income from within equity-income sectors of the sharemarket.

In addition, more advanced portfolio management approaches have been developed over the last 20 – 30 years.

It would seem crazy that these learnings are not reflected in modern day investment portfolios. In a previous Post: A Short History of Portfolio Diversification, it is not hard to see how the Multi-Asset Portfolio has developed over time and is preferred by many large institutional investors.

Meanwhile, this Post: What Portfolio Diversification looks like, compares a range of investment portfolios, including the KiwiSaver universe, to emphasis what a Multi-Asset Portfolio does look like.


Growth in Multi-Asset Portfolios to continue

Increasingly the Multi-Asset Portfolios are taking market share from traditional portfolios.

Institutional investors are increasingly adopting a more absolute return investing approach. This has witnessed an increased allocation, and growth in Funds Under Management, in underlying strategies, “such as private equity, hedge funds, real estate, natural resources, and other strategies whose assets aren’t publicly traded.”


An underlying theme of the CIO article is the Death of the Balance Portfolio, which I covered in a previous Post.

Personally, I think the death of 60/40 Portfolio is occurring for more fundamental reasons. The construction of portfolios has evolved, as noted above, more advanced approaches can be implemented. For those interested I covered this in more detail in a recent Post: Evolution within the Wealth Management Industry, the death of the Policy Portfolio. (The Policy Portfolio is the 60/40 Portfolio).


Concluding Remarks

The current market environment, of low expected returns, might quicken the evolution in portfolio construction toward greater adoption of Multi-Asset Portfolios and a more absolute return focus.

Therefore, the value is in implementation, identifying the suitable underlying investment strategies to construct a truly diversified portfolio, within an appropriate fee budget.

Wealth management practices need to be suitably aligned with this value adding activity.


Happy investing.

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Global Investment Ideas from New Zealand. Building more Robust Investment Portfolios.

Impact Investing – a large and growing market

A recent Report by the Global Impact Investing Network (GIIN) estimated the size of the Global Impact Investing universe to be $502 billion (see: Sizing the Global Impact Investing Market).

It is important to note this is a separate measure “to estimates of the size of related markets (such as ESG or socially responsible investing). Neither, of course, are accurate or complete indicators of the current impact investing market size.”


The GINN report defines “impact investing as investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return. Impact investments are made in both emerging and developed markets as well as across all asset classes, including private and public markets.”


They also note that impact investing has gained significant momentum over the last decade “as both an investment strategy and an approach to addressing pressing social and environmental challenges. Through impact investments, investors seek to generate both a financial return and positive, measurable social and environmental impact.”


The Article provides a detailed explanation of their approach and types of organisations included in the analysis. There is also a section on how to interpret the results.

The database captures many types of organizations. Over 60% are asset managers. About one in five are foundations, and the rest include banks, development finance institutions, family offices, and institutional asset owners.

The database also includes a global group of investors. The majority are based in developed markets, including the U.S. and Canada (58%) and Western, Northern & Southern Europe (21%). It also includes investors based in regions like Sub-Saharan Africa, Latin America & the Caribbean, the Asia-Pacific, and the Middle East & North Africa.



Market Size

GIIN estimates the overall global impact investing industry AUM is USD 502 billion, as of the end of 2018.

They estimate that there is over 1,340 active impact investing organizations across the world.

They also estimate the median investor AUM is USD 29 million, the average is USD 452 million, indicating that while most organizations are relatively small, several investors manage very large impact investing portfolios.

Overall, asset managers account for about 50% of estimated AUM who typically channel capital via specialized managers.

Investments are across the board, including venture capital, private equity, fixed income, real assets, and public equities.

This is an important study, previously, as they noted in their article, a well-defined estimate of the size of the impacting market did not exist. This provides a benchmark to measure future industry growth.



The GIIN Report concludes as follows:

“Since the term ‘impact investing’ was formally coined in 2007, the industry has grown in leaps and bounds. With a growing recognition of the power of investment capital to address pressing social and environmental challenges, impact investing has attracted the attention of an increasing number of investors of all types and from all over the world. Indeed, over 50% of active impact investing organizations made their first investment in the past decade.

This research shows that there are over 1,340 active impact investing organizations across the world who collectively manage USD 502 billion in investments intended to bring about positive change. These figures are a snapshot as of the end of 2018, yet the market is quickly growing and will continue to do so. Indeed, it must: trillions of dollars are needed to effectively address the critical social and environmental challenges that face the world today, such as those outlined in the Sustainable Development Goals.

In order to meet global need, much more capital will need to be unlocked for impact investing — but there is good reason to be optimistic. One in four dollars of professionally managed assets (amounting to USD 13 trillion) now consider sustainability principles. There is great potential for these investors, who have already aligned their capital with their values, to more intentionally use their investments to fuel progress through impact investments. The growing consideration of social and environmental factors in investing is also a signal of a larger shift in the global financial markets — an increasing number of people are recognizing that their money should do more than just make more money. Their investments can — and should — also seek to fuel meaningful, sustainable social and environmental impact.”



This is a very interesting study and provides a benchmark to measure future growth of impact investing. Globally it is a large market and it is sure to grow further.

Likewise, impact investing is gaining a growing presence in New Zealand. Based on international evidence, there is a strong demand from investors for investments that generate positive, measurable social and environmental impact alongside financial returns.

Fort those wanting more background on Impact Investing this report posted by the Ākina Foundation maybe of interest (Ākina Foundation Impact Investing Sept 2017).


Happy investing.


Please see my Disclosure Statement

Global Investment Ideas from New Zealand. Building more Robust Investment Portfolios.







Liquid Alternatives

This is a great article on the benefits of Liquid Alternatives (“Liquid Alternatives Coming of Age”)

One of the big lessons from the Global Financial Crisis (GFC) ten years ago was for investors to seek true portfolio diversification.  Specifically, increase the diversification within portfolios so as to reduce the level of equity risk within them.  Thus reducing the level of portfolio volatility.  This will likely lead to better outcomes for investors in meeting their investment objectives over time.

For investors, increasing the level of true portfolio diversification comes with the added challenge of reducing costs, maintaining high levels of liquidity, and having transparency of the underlying investment strategies.

For these reasons Liquid Alternative strategies have gained increasing acceptance around the world.

The article covers the benefits of Liquid Alternative strategies and a variety of implementation approaches undertaken by a number of Australian Institutional Investors.

Liquid Alternative Investment strategies are a growing allocations across many investment portfolios globally and are an effective means of increasing the true diversification of a multi-asset class (diversified) portfolio.


I have written previous Posts on adding Alternatives to Investment Portfolios.


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Are we in a Bubble?

A developing consensus view is that the US sharemarket is overvalued, certainly by measures such as the Shiller PE (Price to earnings ratio).  Future low returns can be expected based on this measure.

Of course there is some debate about whether this is a bubble. Time will tell.

An earlier Post did touch on this. Another Post put the recent level of sharemarket volatility into a historical context.


Furthermore, the consensus view is that although overvalued the risk of a US recession is low. Generally a recession is needed to trigger a large drop in the value of sharemarkets.

None of the following forward indicators are flashing the risk of a recession: Leading Economic Indicators, ISM Manufacturing New Orders, Initial Unemployment Insurance claims, Durable Goods Order, shape of the yield curve (e.g. are longer dated interest rates lower than short dated interest rates, which is often a precursor to recession) and level of High Yield Credit Spreads.

The consensus view is that the US economy will continue to expand in 2018, now into its third longest period of economic expansion. Over time capacity constraints within the economy will grow further (e.g. falling unemployment) and the US Central Bank, US Federal Reserve (Fed), will continue to raise interest rates as the threat of or higher inflation emerge.

This will result in a “classical” ending to the economic cycle where higher interest rates will result in a slowing of economic activity, resulting in a pick-up in unemployment, followed closely by recession, say late 2019 early 2020. Unfortunately the recession will be felt more heavily on Wall Street (e.g. large share price declines) than Main Street.

This article outlines a paper written by James Montier of GMO. He outlines 4 different types of bubbles:

  1. Fad or mania e.g. dot-com bubble, Roaring 20s, and US Housing market
  2. Intrinsic Bubble e.g. Financials prior to the GFC had inflated earnings
  3. Near Rational bubble – the greater fool market, cynical, and they can keep going as long as the music is playing.
  4. Information Bubble


Montier argues we are in a cynical bubble (3 above), noting many professional investors acknowledge the US market is expensive yet remain fully invested even overweight, based on a BofA Merrill Lynch survey.

He agrees with Jeremy Grantham, many of the psychological hallmarks of a Fad and Mania are absent. Grantham has raised the prospect the US sharemarket may be entering a two year “melt-up” period as the next phase of the current “bubble”.

Time will indeed tell.  Nevertheless, the cynical bubble appears consistent with the consensus view above.


Mortimer’s article also has some great quotes from John Maynard Keynes, a great investor in his own right.


 Please see my Disclosure Statement


Value of Investment Advice and Technology

I thought this was a well written and balanced article about the role of technology within the Financial Advice Industry.

The Uber moment has not really arrived in the financial services industry, particularly not in New Zealand (we have had a few cheap cabs join the ranks!).

The appropriate use of technology and mass customisation of investment solutions is the Uber moment in financial services industry.

The customisation of investment solutions involves a Goal Based investment approach, based on the principles of Liability Driven Investing.

A winning outcome will be the combination of smart technology and smart customised investment solutions.


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Adding Alternatives to an Investment Portfolio – Part 3; Investing Like an Endowment Fund

Part 3 of a series of articles about adding / increasing Alternatives in a Portfolio.

The attached article is a recently published article via the CAIA: Investing Like the Harvard and Yale Endowment Funds.

My previous Posts have outlined the potential benefits of adding Alternatives to a portfolio. This article provides some evidence of the benefits of adding alternatives to a portfolio.

The Endowment Fund success has come from having more than just absolute return funds i.e. hedge fund alternative strategies, but also exposure to real assets have played a part, including a Private Equity exposure. Many Australian Super Funds have benefited from their exposure to unlisted infrastructure and Property.

New Zealand Portfolios generally lack exposure to real assets, private equity, absolute return funds, and alternative strategies.

The Top performing Endowment Funds have benefited from “true diversification”, they have benefited from their allocation to alternative asset classes.

“Their long term investment strategy has prevailed to the extent that long term total and risk adjusted returns remain superior to those of traditional portfolios.”


CAIA Investing like an endowment


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Adding Alternatives to an Investment Portfolio – Part 2

Following on from an earlier post on adding alternatives to a portfolio the attached document is a short and precise commentary on the case for adding alternatives to a traditional portfolio.  See link below.

The Title: “It’s an evolution, not a revolution” sums it up very well.

The article notes that the evolution in portfolio construction has moved away from the old way of style boxes, market expectations, and benchmarks, to a greater focus on the investors (clients) liabilities, risk tolerances, and an investors actual objectives – most likely funding requirements in retirement.

The article references the behavioural finance that people “feel the pain of losses far more they do the benefits of gains”. As they say, Investors want to minimise loses, and focus on outcomes rather than returns.

The article is then nicely concluded referencing one of Warren Buffet’s key influences, Benjamin Graham, quote “the essence of investment management is the management of risks, not the management of returns.”  This is so true.

I agree with their concluding remark, “better to lose less and compound more than to reach for excess returns and fail to reach your objectives”. Alternative strategies can play an important role in compounding returns / wealth over time.

P.S. This article is an editorial that appeared in the Chief Investment Officer magazine.

Evolution not revolution


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Adding Alternatives to an investment portfolio

I first read this article (PDF below) in 2015 when it was published.

I particularly liked their comment as viewing “alternative strategies as part of the ongoing evolution in portfolio construction”.

Hopefully many portfolios have evolved to include an allocation to alternatives, whether non-traditional assets or alternative strategies as characterised in the article.

This article also touches on the theme from my last post about true portfolio diversification “an attempt to push beyond simple diversification in which investors’ funds are divided among multiple assets or asset classes.” i.e. the introduction of the likes Listed Property and Infrastructure into a multi asset class portfolio does not bring “true portfolio diversification” and will more than likely fall short of expectations with respects to the portfolio diversification benefits.

The article’s focus on downside protection is right, and lowering portfolio volatility overall. A Portfolio with lower volatility and a similar return compared to a higher volatile portfolio will produce more wealth over time.

Their framework can also be placed into a Liability Driven Investing (LDI) framework outlined in my earlier posts. In my mind the right “combination of growth and protection” is equal to the right combination of a return seeking portfolio and a liability hedging portfolio as outlined in my earlier posts.

Lastly, if the economic / market case for alternatives was strong in 2015, it must be even stronger in 2018, particularly given many Alternative strategies are more easily accessible, transparent and fee competitive. A number of Alternative ETFs are also appearing. (Not that I am keen on providing market forecasts – more on this in later posts).

Should Liquid Alternatives Be Part of the Core Allocation


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Portfolio Diversification

2018 is shaping up to be a tougher year for portfolios compared to 2017. Albeit the year has started well.

Longer term we appear to be entering a low return environment. This creates some challenges for the industry and investment portfolios.

This article articulates these challenges well and expands the discussion into the potential role Alternative Investment Strategies could play in an investment portfolio.

Amongst the good points the article makes, a couple stand out for me:

  • Focus on the risks in the portfolio (which is not necessarily the categories of the assets)
  • We are at the mercy of what markets deliver in terms of return; that cannot be controlled. BUT, risk can and must be managed to the level consistent with the investment goals.


With regards to Alternative Investment Strategies, as the article says, they must receive serious considerations.

Alternative strategies sometimes offer the way to gain true portfolio diversification and reduce the dominance of listed equity investments within a portfolio.

I mean “true portfolio diversification”. This is harder to attain than is often claimed. For example the addition of listed property and listed infrastructure into a multi-asset class portfolio offers limited diversification benefits. They are after all sectors of the broader listed equity market, which the multi-asset class portfolio will likely have exposure to. These equity sectors will largely behave like the rest of the broader equity allocation, particularly at times of financial market stress. Thereby offering no true diversification benefit. They may diversify your “equity” exposure, but provide limited diversification to a multi-asset portfolio. Listed Property and listed Alternatives are not alternative investments or strategies, they are equities.

I have witnessed in the last year Portfolio’s “diversified” out of the broader equity market and into list property and infrastructure as a means to enhance portfolio yield and diversify the portfolio. Never chase yield. The performance difference between the broader equity market and listed property and infrastructure is 10-12% over the last 12 months. Thereby a very costly result in an effort to “diversify” the portfolio. The diversification benefits of which will also disappoint over time.

These actions reflect a poor approach to portfolio construction and portfolio risk management, particularly relative to a set of future liabilities and investment goals.



Please see my Disclosure Statement