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(Runtime: 5 min, 26 sec; size: 4.06 MB)
Michael Sager, client portfolio manager with CIBC Asset Management.
The question is the role and relevance of multi-asset strategies for institutional investors. Global balanced portfolios have performed very, very well in the past several months. A mix of equities and bonds have done very well, but the outlook for both asset classes is definitely deteriorating. Equity markets’ performance is driven largely by the prevailing macro environment. This macro environment has deteriorated everywhere in recent months. We can see it in terms of weaker growth in Germany, China. The U.S. Has held up better, but it’s nonetheless weakening, and the same is true for Canada. Everywhere the cyclical macro environment is weakening. Consequently, expected equity returns have also deteriorated. In fixed income, continued historical performance has been good, but it’s come at the expense of much weaker future performance. Given both of the outlooks to those asset classes, we need to look elsewhere for a diversifying source of returns.
Illiquid alternatives has been the first choice of many plans, but here too, valuations look really stretched. To my mind, that leaves liquid alternatives as an important opportunity, as a way of improving expected returns and as a way of diversifying away from risks inherent in a global balanced portfolio. Liquid alternatives include multi-asset strategies.
Just quickly, what are liquid alternatives? There’s really two aspects. First, these strategies typically invest across a mixture of traditional asset classes, including equities and bonds, but also alternative asset classes, including currencies and commodities. That’s the first aspect. The second is they combine best-in-class hedge fund investment strategies, both long-only positioning but also long-short, with liquidity, transparency, and increasingly important, low fees. That’s a really attractive combination that delivers many layers of diversification.
That’s what they are, and because of that diversification, they do provide that opportunity in this difficult return environment that I think we’re heading into. They do offer that opportunity to just improve expected returns, achieve a little bit higher-target returns. Just to emphasize a little bit more, liquidity is really important to many investors, particularly in a world of slower cyclical growth that’s going to be challenging for equity performance.
Where does a lot of the diversification that multi-asset strategies offer — where does that diversification come from? It’s really in a number of layers that are built into these strategies. First of all, it’s the asset classes, that mix of traditional and alternative equities and bonds, but also liquid alternative: currencies and commodities that are driven by different fundamentals. So, first layer of diversification. The second is different strategies. Traditional balanced portfolios are focused on long-only. Multi-asset strategies are focused on a mix of long-only, but also long-short, a mix of beta strategies but also idiosyncratic alpha. Each one offers something different: different investment horizon, multi-quarter all the way down to holding horizons that assist for a few weeks or a couple of months. Nothing shorter term than that, but different horizons give you different information. Different information gives you diversification.
Then a mix of ways of identifying information, quantitative strategies, but also fundamental judgment. Quantitative strategies are great because they value assets today relative to their history, but they’re essentially backward-looking. The great benefit of including qualitative judgment into a process is that you can be much more holistic, draw on many more fundamentals, but also be forward looking. Each one of those layers — assets, strategies, horizons, methods — give diversification to multi-asset strategies, and really improve the smoothness, we think, of expected returns in the overall investor portfolio.