- Through broad diversification across different asset classes, multi-asset funds can reduce the risk of potential losses.
- At the same time, such an investment mix could provide opportunities for returns in the long term.
- Whether following a defensive, balanced or offensive profile – multi-asset funds can serve as universalists for many market situations.
US investment legend Warren Buffett once framed the secret of stock market success like this: “Rule number one – never lose your money! Rule number two – never forget rule number one!” Quite a few investors would probably like to heed this advice – though in practice there is, of course, no guarantee of success.
It nevertheless could be asked whether, for example, multi-asset funds could help avoid excessive loss risks. After all, fund managers of multi-asset funds can, beyond shares and bonds, draw on additional asset classes such as gold, commodities, real estate and currencies. The risk diversification is therefore often particularly high in multi-asset funds.
Risk management through flexible strategies and broad diversification
The lower the link between individual assets in a multi-asset fund in terms of performance and volatility, the more loss risks can be contained. Because asset classes behave differently in different market phases, the gains of some can either cushion, offset, or in the best case, more than make up for the losses of others.
"The corona pandemic has once again shown that there is often light and shade in a crisis on the financial markets. While, for example, gold experienced highs in 2020, the Dollar lost ground against the Euro," explains Björn Jesch, Global Head of Multi Asset & Solutions and CIO EMEA at DWS.
Equities and commodities can, for example, provide above-average return opportunities during economic upswings. When the economy booms, corporate profits but also the prices for commodities usually rise which are then in greater demand. Precious metals such as gold, on the other hand, have often proven to be a yield generator in more difficult times.
71 billion euros in capital inflows were recorded by investment funds in Germany by the end of September 2020. That is roughly as much as in the entire previous year. (Source: BVI)
Multi-asset funds can be constructed for any risk appetite
In addition to the classic asset classes, multi-asset fund managers often also resort to investments from the infrastructure, private equity and derivatives segments to diversify even further. The latter, if used carefully, can even help to hedge against losses of particular components in a multi-asset fund.
Some multi-asset fund managers push even further into the niches of the financial market by adding impact or thematic investments to their portfolios – for instance an actively managed basket of shares representing the current megatrend of digitalisation.
A multi-asset fund can in many ways be adapted to an investor's risk appetite. A distinction is usually made between a defensive, balanced or offensive profile, depending on whether the priority is more on capital preservation or on return opportunities. Ultimately the same applies to multi-asset products: Only more risk opens up opportunities for more return.
"How well a multi-asset fund performs is at the end of the day in the hands of the fund management and its market assessments," says Björn Jesch. "The management has to keep an eye on the big picture, constantly reflecting and deciding when, how and to what extent it shifts assets within the fund." Ideally, the fund management overweighs individual asset classes precisely when they deliver the highest returns, i.e. equities in upswings, for example. Investments correlating as weakly as possible with these assets should at the same time reduce the risk of losses in phases of turbulence – whilst offering their own return opportunities.
New stock market year, new challenge for Multi Asset
Multi-asset funds can therefore play the role of universalists for boom and crisis. Against this backdrop, it is not surprising that, according to the latest statistics of the German Fund Association BVI, mixed and multi-asset funds recorded the largest inflows into mutual funds in the Corona year 2020, having raked up a total €7.8 billion as of the end of September.
And 2021 could likewise be a promising year for multi-asset investors. The ongoing pandemic, the expected recovery of the global economy, the persistent low interest rate environment, the relatively high valuations of many equities as well as geopolitical factors such as the new US administration should again provide plenty of opportunities for light and shade at the markets, offering opportunities for broadly diversified investments.
Fund manager Björn Jesch emphasises that "in 2021, it will be more important than ever for fund managers to weigh up from a multi-asset perspective which assets are still worth chasing for another percentage point of return and where it would make more sense to hedge the portfolio for a possible stress scenario." Following this careful approach gives Warren Buffet's second investment mantra a great chance of being heeded successfully.