Time to Reevaluate Multi-asset Investing

The reputation of multi-asset investing, also known as global asset allocation (GAA) or global tactical asset allocation (GTAA) investing, has diminished undeservedly over the last several years. Some see it as a strategy that cannot deliver attractive returns. But that opinion rests on the misperceptions that: first, the performance of the average multi-asset manager is representative of the performance of all multi-asset managers; and second, weak performance by the overall universe of multi-asset managers will persist.

Investors should not concede this strategy for three primary reasons.

1. A small group of multi-asset managers with a truly tactical approach has generated benchmark-beating returns over periods as long as 10 years. Accordingly, investors who have been disappointed by a strategy’s results should consider adding a second multi-asset strategy that takes a different approach from their original multi-asset manager. They may also need to reconsider the role that the strategy plays in their asset allocation. 2. Tactical multi-asset managers can play a role different from multi-asset managers’ traditional role of providing exposure to asset classes that plans could not access easily. Instead, they can potentially add value by emphasizing areas of the portfolio’s strategic asset allocation that are likely to do well over the short to intermediate-term. Plans and their consultants cannot move as quickly as a tactical manager.

Thus, they should consider using a multi-asset manager for tactical reasons, rather than strategic reasons.

3. The recent increase in asset class return dispersion—a broader range of outcomes between asset classes—will likely favor these tactical multi-asset managers.

The time is right for multi-asset investing skeptics to give this strategy a chance.

The dominance of the multi-asset category by value-oriented and equity-oriented managers (managers who also tend to take a more strategic than tactical approach to investing) has overshadowed the emergence of managers who are lumped into the same category but who perform differently. Some investment plans mistakenly assume that all multi-asset managers perform similarly. Even investment professionals fall victim to “narrow range of experience” bias, which happens when a person considers too narrow a range of experience when making an estimate or judgment. As a result, they overlook managers who could potentially help their overall portfolio performance.

Multi-asset investing is an investment strategy for which manager selection matters more than for other strategies. This is evident from the low percentage of outperformers: Of the 162 firms in eVestment’s GTAA category, only 9.9% have consistently delivered top-quartile performance over three-, five-, and seven-year periods ending September 30, 2021. That’s only 16 out of 162 firms, suggesting that plans’ issues with multi-asset managers are a matter of picking the right manager, rather than a problem with the strategy itself. Some managers in this strategy have outperformed by making bold allocations to investment styles with sustainable momentum, taking a more tactical approach than many of the firms in the same category. It’s almost as if they don’t belong in the same category as the other firms in the GTAA category. One might call them multi-asset managers with a truly tactical bias. But there’s a limit to how finely the databases can break down categories. So, discerning consultants and investment plans must uncover the differences on their own.

The 10-year record of relative performance by tactical versus strategic GAA managers favors this tactical approach. Almost 70% (69.2%) of tactical GAA managers versus only 43.3% of strategic GAA managers beat their benchmark over similar time periods, according to Morningstar.

What clients need from multi-asset or GAA managers has changed over time. In the early years of this strategy, clients needed these managers to provide diversification and exposure to asset classes they couldn’t access easily or directly. Since then, plans have diversified significantly with the expert help of their consultants and the advent of investment products. In a sense, the consultants have now filled the role formerly filled by a strategic multi-asset or GAA manager.

Institutional portfolios can benefit by adding a tactical complement to their strategic asset allocation. Tactical multi-asset managers can potentially add value by emphasizing areas of the portfolio’s strategic asset allocation that are likely to do well over the short to intermediate-term. While plans and their consultants may recognize these same opportunities, they’re not set up to move as quickly as a tactical manager.

Most plans don’t allocate only to one large-cap or one small-cap strategy. Such diversification is even more true of their hedge fund allocations, which may include five or more funds. Similarly, they should consider broadening their exposure to multi-asset managers to go beyond a strategic to a tactical multi-asset manager and to further diversify investment style and manager selection risk.

Historically, multi-asset investing strategies have performed best in environments with significantly dispersed asset class returns. However, the financial crisis of 2008 to 2009 started a period of low dispersion. During this period, U.S. growth equities have performed best. As a result, the many multi-asset managers with a value bias and higher allocations to fixed income have performed poorly relative to an equity-centric portfolio.

4,800

2,400

S&P 500 Price: January 2000 – December 2021

Growth over Value Domestic over International

1,200

600

2000 2001

Source: FactSet 2002 2003 2004 2005

2006 Bull Market

2007 2008 2009

2010 Bear Market

2011 2012

2013 Covid-19

2014 2015 2016

2017 S&P 500

2018 2019 2020 2021

Since April 2020, dispersion in asset class returns appears to be increasing, creating what look like more favorable conditions for multi-asset investing (see graph).1 If there is a correlation between dispersion and multi-asset strategy returns, this should lead to better relative performance, especially by tactical multi-asset managers.

1/00 1/01 1/02 1/03 1/04

Source: FactSet and Balentine 1/05 1/06 1/07 1/08 1/09 1/10 1/11 1/12 1/13 1/14 1/15

High Dispersion Low Dispersion 1/16 1/17 1/18 1/19 1/20 1/21

The history of investing suggests that, over time, strategies will cycle in and out of favor. Multi-asset investing’s time will return. It’s impossible to predict when exactly that will occur, so we feel it’s important to position portfolios now. Investors who don’t reposition until a shift is evident may miss some of the biggest potential gains.

The bottom line: First, add a multi-asset manager if your investment fund lacks one. This is important as the dispersion of asset class returns increases, so you position your portfolio before it’s too late to reap the full benefits of an allocation in this strategy. A multi-asset manager’s ability to quickly make tactical changes could potentially protect investors when they need to de-risk in a protracted bear market.

Second, if you already have one multi-asset manager, consider adding another multi-asset manager who takes a tactical approach to this strategy. The difference in the two managers’ performance could serve you well.

In either case, it makes sense to consider a manager who has consistently beat the benchmark.

1We define dispersion by looking at the average monthly excess return of each submodel and then quartiling the data. Months in the top two quartiles are considered months with high dispersion; months in the bottom two quartiles are considered months with low dispersion.