Using multi-asset funds to lift, smooth investment returns

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Glenn Freeman: In this edition of "How We Invest Your Money" I'm speaking to Steve Waddington, who is a Portfolio Manager with Insight Investment and we're speaking about multi-asset.

Steve, thank you very much for your time today.

Steve Waddington: Thank you.

Freeman: This strategy provides access to fixed income, equities and to real assets. Now, when you're speaking about real assets there, can you also talk us through what you're referring to? And how the weights to these different sectors change over time?

Waddington: Yeah, certainly. So, we use a multi-asset approach to constructing the portfolio which does, as you say, we want to access a variety of different underlying assets to hit our return target, whether that be equity market exposures, fixed income exposures. Within real assets, as you say, it can be commodities, it can be real estate, it can be infrastructure. But they are all providing market-based exposures and we also access, what we call, total return strategies, which means positions in the portfolio which are less reliant on the overall direction of investment markets to help us hit our overall return target. By accessing all those different sources of return that gives us a greater confidence of hitting our return target overall but also delivering the return and the profile that we're looking for, which means limiting the drawdowns together to give a smoother investment journey over time.

Freeman: And in terms of the way that this is structured, I understand there's one underlying which I think you mentioned that it's about $12 billion of underlying assets, but this is spread across different markets; there are different vehicles that investors can use to access it and it has been previously somewhat institutionally focused, but it's shifting more towards of a retail focus?

Waddington: That's absolutely right. So, we've been managing this strategy since 2004. So, it's meant we've been through a whole range of different environments, whether it'd be the GFC or more recent turbulent periods. But the same strategy has been applied. And given we take a global macro approach to how we construct the portfolio, we have no home bias. So, even though we are based in London, it means we want to make this strategy available to clients throughout the world. We have U.K.-listed funds; we have U.S.-domiciled fund; and we have here an Australian-domiciled pooled vehicle which gives access to institutional and the wholesale clients in the market. But importantly, it's different investment vehicles giving access to the same underlying strategy which we've been operating since 2004.

Freeman: Sure. And how long has the Australian-domiciled vehicle been operating?

Waddington: Almost five years now. So, it's given a good track record of demonstrating how a strategy can work giving access to all those clients here on Australia to our underling capabilities.

Freeman: And speaking about multi-assets, we often hear about that as being a strategy that can be more efficient during periods of volatility. Can you just explain for us why that is and what are some of the trade-offs that investors might make in going multi-asset? Obviously, there's more – you said that the way things are quite dynamic. So, how does that play into the cost of these types of strategies?

Waddington: You raised some good points there in terms how we are able to move the assets and also, the cost implications of doing that as well. So, the first point is that the types of exposure we're looking to access are both market-based, so you mentioned equities, fixed income, real assets, but also those which are less reliant on market direction, which means, when you have periods of stress, often volatility increases and the types of strategies we can access then are far more attractive. But by accessing both of those sources of return means that it can lift your overall return profile and also smooth that profile over time.

Now, having access to that broad range of opportunities is important. But also, we need to be fairly dynamic in how we can change those exposures to reflect our view of how the world will be evolving and where the opportunities are, which means you need to be very efficient in implementing the portfolio. We do have a variety of underlying instruments that we use to implement, whether it'd be exchange-traded futures, some direct holdings, for example, in government bonds, or we can use some derivatives in the portfolio. But the opportunity set is wide not in terms of just the economic exposures but also the instruments we use to implement the portfolio which when you bring that back to the transaction costs means we have a very efficient implementation of the portfolio, something which means we want to eke out every single basis point we can to outperformance for clients.

Freeman: And investor behavior is something that you've also – you've said informs the process, the portfolio construction process you follow there. How does that play in?

Waddington: Well, if you think about our overall view formation, we look at valuations as many other asset managers in terms of trying to identify cheap assets and therefore the future returns are far greater or expensive assets and therefore stay clear of those areas. But bringing out together with an understanding of the economic environment is really what hones the view of where we'd want to gain exposure in a portfolio. But we are also cognizant of that, that's our view of the world and what we need to be also aware of is how others are positioned. Are the consensus trades and therefore the risk behind those trades is that many comes out of those assets or areas which are under-loved and the potential for money to go into those assets and see the prices rising. So, when we factor those three points together, it means we can look at the markets to understand how others are positioned and therefore what are the risks or where are the opportunities that we want to be capturing in that exposures.

Freeman: And just finally, we spoke earlier about the different types of sectors that you cover. But when you get down to the details of the specific companies or the assets that you buy, how do you select those for the funds? What's the process that your team follows?

Waddington: Well, it really takes a global macroeconomic approach. So, as I mentioned, we look at the valuations to understand pricing, but importantly, we look at the underlying economic environment. What we do is, converse to what some people do, which is just look at historic mean variance optimization type approach. And we think it's far more appropriate to start off with an understanding of what that economic environment is like, then to understand what the implication on different sources of assets will be. So, what do you expect to perform in that environment? That's a far greater confidence of understand that and therefore, to position the portfolio. So, having that understanding helps drive our awareness of what we'd want to gain exposure to and how to manage through the different environments, particularly in periods where you can see some fast-changing data which can amend the view on how you should be positioning the portfolio.

This report appeared on 2019 Morningstar Australasia Pty Limited

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