A practical example can be found in the increasingly unreliable correlation between asset classes. As shown in the chart below, at various points, the conventionally and dependably negative stock/bond correlation has confounded historical norms and turned positive.
In essence, investors cannot trust asset classes to behave. This batters the notion that a simple long-only, stock/bond balanced portfolio still constitutes true diversification and underscores the need for investors to reassess where their diversification is coming from and the stability of that source.
Relying on long-only beta to deliver returns may not be enough. It will become increasingly necessary to tap into a mix of sophisticated strategies such as relative value, derivatives, and dynamic hedging strategies – to diversify away from less attractive traditional asset classes and to deliver positive returns across both up and down markets.
Broadly speaking, the same paradigm holds true in the increasingly fraught hunt for income. It is well known that in a yield-starved world, traditional sources of “risk-free” income have dried up. The pain is particularly acute for post-Brexit UK savers. They face a toxic cocktail of crumbling rates offered by banks and building societies combined with the likelihood of rising inflation from the weaker currency. That will cause stagnant returns.
To avoid the dreaded savings erosion and beat inflation, investors need to exploit a wider band of income sources, but at the same time, not fall into the trap of blindly chasing yield with no regard to risk.
Multi-asset income strategies able to tap into globally diversified income streams can help maximise risk-adjusted returns. That may sound like a sales pitch, but it’s an important point if we step back to think about current market sentiment. We’re more than six years into a bull market in equities and 30 years into a bond bull market. Even acknowledging the post-crisis risk aversion, that’s had an impact on investor mentality. Many investors are thinking first about chasing yield and return, with less attention on the risk. Chances are riskier assets can continue to do well – we remain positive on them overall – but it’s not going to be smooth sailing.
There’s another reason multi-asset income funds are particularly relevant to the low return world. They are increasingly being used to replace what was previously the “low risk” part of investor portfolios. What once would have been a traditional bond allocation today is nearly unfeasible. Bonds are incredibly expensive and provide little income – no surprise given the whole point of quantitative easing has been to push investors further out on the risk spectrum by making the returns of so-called “risk-free assets” de minimis. Higher-risk assets are the only game in town, so it makes sense that multi-asset income funds able to incorporate these opportunities while balancing the volatility inherent in higher-risk exposures are becoming more accepted as a portfolio foundation.
