Multi Asset investing – a panacea for our times

The promise of a better year in financial markets during 2010 seemed to come unstuck just a few short weeks into the year. Should we have been surprised? Certainly, the threats to market stability that surfaced in late January were on the radar screen at year-end.

On top of Chinese efforts to cool their economy, and the strong regulatory attack on the banking sector launched by President Barack Obama, we have had to endure the ongoing drama of the Greek debt problems and the threat of contagion of the PIIGS – Portugal, Italy, Ireland, Greece, Spain (what an unfortunate, if apt, acronym). The credit crisis has shifted from the private to the public sector and the bond vigilantes are back in town.

Benign market expectations have been overtaken by reality, proving after the event that investors still remain skittish, perhaps wary of believing too much good news after the trauma of the past two years. Furthermore, this early year hiatus only serves to illustrate that markets will increasingly be driven by policy decisions, the timing and direction of which are inherently difficult to predict.

There is still a lot of good news around; witness the strong rebound in economic and profits growth in the US and across a broad swathe of the developing world economies. More to the point, however, is how sustainable this proves to be over the rest of the year and beyond. A high level of uncertainty is exacerbated by the tension between markets and government. And so we face a multiplicity of scenarios and potential outcomes, some better, some worse, which investors must digest and try to make sense of.

Uncertainty equals volatility and while we at Ashburton believe there is currently value in risk assets relative to very expensive cash and government bonds, the path upwards is likely to be very challenging.

Over the past year, retail investors have reacted to the markets in a number of ways. Some remained inherently cautious, preferring the safety of low risk government bonds. Some of course turned bullish very quickly and reaped the full benefits of last year’s equity rally. In a world where yield has become a scarcity, more discovered the world of corporate bonds. The premium on these yields relative to government debt has now compressed to such a degree that certain blue chip companies are priced as a better risk than many countries. And increasingly, intermediaries and their clients are also turning to multi asset funds, recognising that this persistently volatile environment does not lend itself to a buy and hold strategy in a single asset class such as equity.

Ashburton has long been a proponent of multi asset investment; indeed our core business is built on this premise. Our record proves that combining the risk-reward characteristics of several asset classes provides diversification and superior risk-adjusted returns over the long-run. Over long periods of time we believe that multi asset funds will provide a steady accumulation of wealth, without much of the pain and volatility that vicious swings in individual markets and various asset classes can bring. In any form it will not be a get rich quick scheme but it provides a certain “sleep at night” factor for the investor.

For us, the attraction of multi asset investment lies in the fact that it is a rational approach to managing the decision of where to invest in an ever expanding universe of options. And like all successful investment styles, the concept is relatively simple to define and understand and therefore straightforward to apply consistently.

One only has to think of the successes and failures of the investment world to understand the importance of this concept; the bursting of the technology bubble at the turn of the century revealed investors’ failure to get to grips with the underlying business model (or lack thereof) while the more recent and opaque example of the securitised sub-prime mortgage market will weigh heavily on both a number of minds and balance sheets for a long time to come. Conversely, like most successful value managers, Warren Buffett and Charlie Munger of Berkshire Hathaway invest for the long-term in business models they understand and at prices that make sense to them – what could be easier or more successful?

The true measure of risk is the investor’s capacity or willingness to lose money in the pursuit of returns. Extended periods of heightened volatility, such as we are experiencing now, obviously increase the chance of losing capital. At a time when yield in is in scarce supply and returns uncertain, professionally managed multi asset investing is a smart way to go.