How can investors create an effective multi-asset investment strategy amidst market volatility? This question has been on the minds of discerning investors looking to weather the storm during volatile times.
“An effective multi-asset strategy is about selecting a combination of different assets that can best sustainably protect and grow a portfolio under various market conditions over a target time horizon and desired risk tolerance,” explains WMI’s faculty member Dr Aaron Low, CEO of wealth platform Lumiq.
“Traditionally, these asset classes can include equities (stocks), fixed-income securities such as bonds, real estate investment trusts (REITs), commodities, and alternative investments – such as hedge funds, private equity, venture capital, and on.”
Prior to heading Lumiq, Aaron was Head of Asia Ex-Japan at PIMCO, where he oversaw Asia investment strategies and managed global and emerging market bond portfolios. He was also the global Chairman of the Board of Governors of CFA Institute. Based on his wealth of experience, including his previous role as Head of Investments, Asia, at Allianz GI, he shares with us some strategies to navigate market volatility and build a resilient portfolio.
Aaron explains that it “involves diversification across various asset classes, including both liquid transparent public markets and alternative assets, to reduce risk and capture growth from different economic sectors and geographical areas.”
The allocation to each asset class within the portfolio may vary based on factors such as investment goals, risk tolerance, time horizon, and market conditions. For example, in response to the prevailing expectation among most family offices of sustained positive US real interest rates, the allocation to developed market bonds increased to 16% in 2023 from 12% in 2022, according to UBS Global Family Office Report 2024.
However, the core theme is ties back to diversification; reducing overall risk and potentially improving returns by spreading investments across different asset classes that may perform differently under various market conditions. Family offices are looking beyond traditional asset classes, such as private equity and venture capital, toward other types of alternatives. Private debt grew from 8.3 per cent of family office fund searches in 2022 to 12.4 per cent in 2023, hedge funds from 5 per cent to 10.7 per cent, real estate from 13.2 per cent to 18.4 per cent, and infrastructure from 1.7 to 3.2 per cent, a Preqin Report reveals.
Aaron believes that when building a multi-asset portfolio, adaptability, picking quality investments, and having a long-term perspective would provide longevity and increase opportunities for returns. Here are his recommendations:
- Balance public and private market investments to mitigate volatility risks
Diversify public market offerings such as stocks, bonds, and commodities to help mitigate risks associated with market volatility. It’s crucial to balance between equities for growth and fixed-income securities for stability. At the same time, investments in private equity, private debt, real estate, and infrastructure should be added to offer higher potential returns and lower correlation with public markets, providing a cushion during periods of volatility. - Asset allocation and portfolio rebalancing based on long-term goals
Establish long-term investment goals and allocate assets accordingly, adjusting for risk tolerance, investment horizon, and financial objectives. This strategy involves periodically rebalancing the portfolio to optimise the desired asset allocation. - Tactical asset allocation
This involves taking advantage of short-term market movements to enhance returns or mitigate risks. It requires a more active management approach, adjusting exposures to different asset classes based on market conditions and forecasts. - Risk management
Implement strategies to manage risk, such as using derivatives for hedging, employing stop-loss orders, and setting limits on portfolio exposure to specific sectors or regions. - Liquidity management
Ensure there is enough liquidity in the portfolio to meet short-term obligations and take advantage of investment opportunities as they arise. This might mean keeping a portion of the portfolio in cash or in highly liquid securities.
