Multi-asset strategies have ascended in the past few years, with the growth in assets under management (AuM) matched by abundant product launches. Liquidity, transparency and fees lower than many other liquid alternatives have made multi-asset strategies attractive options for constrained investors (e.g., defined contribution pension schemes with liquidity and fee constraints, or small institutional investors with governance constraints). Meanwhile, larger, less constrained investors have also found a place for these multi-asset strategies within their portfolios, particularly where they can demonstrate diversification benefits within the broader asset mix.
Mercer separates Multi-Asset strategies into four main universes:
As the popularity of, and assets under management in, multi-asset strategies has increased, the range of strategies available to investors has also been expanding. We currently have more than 500 strategies listed in our Global Investment Manager Database (GIMD) within the Core and Idiosyncratic Multi-Asset categories. In 2014, Mercer created these two subcategories in order to delineate some key differences in the sources of risk and return between various Multi-Asset strategies, as well as to highlight the different roles that they can play in portfolios. See Table 1 below for a summary of the key points.
As the market has evolved, providers have continued to innovate and push the boundaries of these two categories, and we believe that the multi-asset space should be seen as a spectrum of strategies. The extent to which a strategy utilizes underlying active management, exploits dynamic asset allocation, and/or relies on market directional and non-directional return drivers all contribute to this breadth of options. To help understand the key characteristics of the diverse range of strategies within this spectrum, we informally separate them into a number of subcategories. We summarize these in Table 2.
A passive core strategy attempts to provide access to a range of market betas in a cost-efficient manner through the use of passive instruments. The portfolio has a clearly defined strategic asset allocation, and rebalancing ranges are based on long-term risk and return expectations, with periodic reviews. Equity market risk remains the primary driver of returns, but with total returns expected to exhibit lower volatility than equity markets through the introduction of allocations to fixed income and possibly some listed alternatives, such as real estate and infrastructure.
An active core strategy builds on the Passive Core universe by introducing some, or all, of the following additional return drivers: security selection through allocations to actively managed underlying strategies; a degree of dynamic asset allocation; and limited use of non-directional trades either directly or through allocations to Absolute Return strategies. Despite the addition of these return drivers, equity market beta remains the primary return driver for most strategies in this space, resulting in a high correlation with equity markets. The few exceptions to this generalization are those strategies that have a higher-than-average allocation to alternatives within their strategic allocation.
Download our article, Making Sense of Multi-Asset Strategies, to learn more about the nuances of multi-asset investment strategies.