In his last post, Yoram Lustig explored the performance of active portfolio management. Today, he looks at recent regulatory developments and concludes this series of articles about why multi-asset investing is an appropriate method now.
Following the devastating effects that the 2008 global financial crisis had on investors, regulators around the world have intensified their scrutiny on providers of investment management services. The goals of the regulators are to avoid another financial meltdown, protect investors and ensure that the investments made by investors match their risk appetite, the services they receive have transparent pricing, and the service providers are competent.
The days of selling a basket of equity funds for an individual who saves for retirements are gone. Today, advisers need to profile the individual, construct a portfolio matching the profiled risk level and ensure that it remains so. Here is where multi-asset portfolios can help.
The Financial Services Authority (FSA) introduced its Retail Distribution Review (RDR) in January 2013. RDR emphasises risk and advisers need to ensure, among other things, that the risk of their services matches the risk appetite of their customers.
Multi-asset investing enables advisers to control the risk level of the portfolios of their customers to match their risk appetite. Equity only products derive most of their risk level from the risk of equity markets. Multi-asset products, conversely, can control their risk level by the allocation decision and asset mix. If you want less risk, allocate less to equities, and vice versa.
RDR is an example for regulatory changes in the United Kingdom. However, these changes are not exclusive. The European Securities and Markets Authority (ESMA) also emphasises risk as a fundamental consideration for evaluation of investments. As more regulators around the globe push advisers to deliver risk controlled investments, multi-asset investing, with its risk controlling features, will continue to spread.
Shift to investment solutions
The starting point of managing wealth or assets is always the investment objectives of the investor or group of investors. You cannot manage a portfolio without understanding what you are trying to achieve. Investors seek different things from their investments. Most investors want returns for savings or income. Some investors want to hedge liabilities. All investors care about the outcomes and less about how the outcome is achieved. No investor has an objective of investing in equities or bonds; the important thing is the results that the investment generates. You invest in equities or bonds for their returns, not for the fun of holding them. Only by combining different asset classes and financial instruments, portfolios can be tailored to specifically meet specific investment objectives.
Multi-asset portfolios can generate returns from risk assets, income from yielding assets, liability matching from fixed income instruments and derivatives, and long-term inflation protection from real assets, all within a risk controlled environment. Multi-asset investing can be a solution to real investor needs, not just an investment product.
As Yogi Berra said the future ain’t what it used to be. Investors cannot put all their eggs in the equity basket, forget it and expect to reap financial rewards, as it was in the 1980s and 1990s.
Investors need to control risk through diversification, dynamically asset allocate to mitigate risks and take opportunities, use the full investment opportunity set offered by financial markets to generate returns, and construct investments that provide solutions to their needs. Multi-asset investing is the answer and there is little wonder that it is increasing in popularity.
Yoram Lustig is the author of Multi-Asset Investing: A practical guide to modern portfolio management – available to buy from Harriman House.