The Keys to Building Multi-Asset Portfolios

There is a variety of requirements for building out a successfully balanced multi-asset portfolio, given widely differing global economic scenarios and the relative risks they may carry, according to portfolio specialists at Standard Life Investments. A broad set of collaborative teams and a deep organizational platform can help assure success at the task. Components of Multi-Asset Portfolios “There are three key components to multi-asset portfolios,” explains Mark Foster, the investment director for absolute return, LDI, and multi-asset investing at Standard Life Investments. “The first component is looking at a breadth of ideas, making sure that you have lots of strategies, and that you’re not being constrained by a benchmark,” he says. “Using a cash benchmark allows the portfolio managers to only invest in ideas where they expect to get a positive return,” he says. “We’ve got over 50 people in our multi-asset team, and more than 400 other investment professionals who can add ideas to the portfolio,” he notes. “The second thing you need is a good balance of risks, so you want good ideas that work well from a diversification point of view,” Foster says. “What we do is build a portfolio that has as little risk as possible to generate the targeted return and is not dependent on any particular style of investing,” he says. “Finally it is important to take a longer time horizon because that means you can extract the maximum value for your investors and you don’t have to listen to short-term noise in markets,” says Foster. Anticipating Global Scenarios The process utilized to assure that multi-asset portfolios are protected against risk is to consider a broad range of potential market scenarios and prepare for the impacts. “We get ideas from many different sources: the multi-asset team, the emerging market debt team, the equity team, the credit team, and others,” says Foster. Cooperative expertise is a key to the process of developing the balanced portfolio, observes Alexander Wolf, an emerging markets economist at Standard Life Investments. “There is very good crossover between teams where we consider the scenarios and develop the strategies, for possibilities like a Chinese hard landing or a deepening of the Russian-Ukraine crisis,” he says. “We consider and develop strategies around financial, economic, and geopolitical crisis scenarios, and then the quantitative team measures how the portfolio would react in such scenarios,” he says. Once potential variables have been identified and quantified, portfolio balancing takes place. “The portfolios embrace a mixture of the ideas that we come up with to fit the risk-return premise,” points out Richard House, the head of the emerging markets debt team at Standard Life Investments. Team and Layered Risk Management To manage risk in a complex multi-asset portfolio, a multi-layered strategy is required to achieve its goals. “We seek to deliver absolute return and preserve capital where possible, irrespective of what is happening in risk markets,” says Foster. “For example, for duration or interest rate sensitivity, you want to be able to go short, because if interest rates go up faster than expected, then you still can make a positive return in that environment,” he says. Managing the risk also requires substantial organizational depth. “We use a risk-based approach that has organizational structure as well as process,” says Foster. “We have a multi-asset risk and structuring team that looks at strategies individually and collectively in the context of the overall portfolio, an independent investment risk team that looks at all our portfolios at Standard Life Investments, and an investment governance team which looks at the integrity of the process for particular strategies,” he says. “Then taking it up a level, we have an executive risk and exposures committee looking at counterparty risk and what instruments we want to make available to our multi-asset portfolios,” he concludes. . Click here to watch Part 1: How Today’s Economic Conditions Affect Global Multi Asset and Fixed Income Investing Click here to watch Part 2: Volatility in Emerging Markets Brings New Opportunities Click here to watch Part 3: Multi-Asset Investing Trends to Look For Important Information: References to future returns are not promises or even estimates of actual returns that Standard Life Investments may achieve, and should not be relied upon. The forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation. In addition, the forecasts are based upon subjective estimates and assumptions about circumstance and events that may not yet have taken place or may never do so. Past Performance is no guarantee of future results. 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