• Multi-Asset & Macro
  • Multi-Asset
  • Equities

Making multi-asset portfolios more nutritious

As the era of extraordinary monetary stimulus draws to a close we believe that it is time to take a new approach to multi-asset investing.

man eating money from plate

In 1952, Harry Markowitz, the Nobel Prize winning economist, developed Modern Portfolio Theory. Like nutritionists who recommend eating a balanced diet, rather than guzzling solely on chips, he discovered that mixing a selection of assets with different risk and return characteristics can create the optimal portfolio. And for over 50 years his theory has been widely accepted as the staple diet for investment professionals managing portfolios.

At the heart of Markowitz’s theory is diversification; the idea that holding a variety of investments smooths out some of the bumps in performance and helps preserve capital during periods of market stress. Reflecting the more limited investment options available at the time, this concept led to the popularity of simple 60:40 equity and bond portfolios, which have tended to deliver decent returns for investors. This was particularly true during the past decade when returns were supercharged by ultra-loose central bank monetary policy. However, bull markets cannot last forever.

Is a diet of just equity and bonds healthy?

Graph
Source: Lipper, a Thomson Reuters company, as at 08 October 2018. Global bonds are defined as the Bloomberg Barclays Global Aggregate Total Return Index* (GBP hedged) and global equities are defined as the MSCI AC World Index**. The 60:40 equity bond portfolio is a combination of the two indices rebalanced on a monthly basis. Data from 01 January 2007 to 31 August 2018.

Past performance is not a guide to future performance.

In an environment where inflation is creeping up and monetary policy is becoming more restrictive equities may continue to perform well, but bonds will probably struggle. With the yields on global bond indices having declined to historical lows, whilst interest-rate risk has increased, the defensive qualities of bonds have become less attractive. In fact, the defensive characteristics of bonds have already become less reliable as seen in the ‘Taper Tantrum’ of 2013, the ‘Bund Shock’ of 2015 and the sell-off earlier this year when falling bond prices actually precipitated a sell-off in equities.

Broadening the menu 

These episodes explain why taking a different approach to managing multi-asset portfolios can be helpful.

Firstly, bond diversification should be enhanced. Rather than treating bonds as one homogenous low-risk asset class we are careful to differentiate between high-risk and low-risk bonds. High-risk bonds are treated like equities, whereas low-risk bonds are treated as a defensive asset. Furthermore, we look to diversify geographically and include non-mainstream fixed income assets, such as emerging market debt and Australian government bonds.

Secondly, additional asset classes are necessary. By adding lower correlated assets, such as absolute-return strategies, broad diversification gains can be made.

Thirdly, active management of asset allocation. It makes sense to have the flexibility to increase or decrease risk as well as make specific sector and style calls. Moreover, when reducing risk, we do not have to add bonds. We can use other assets such as cash or property.

Diets are notoriously faddy but one golden rule seems to stand the test of time: balance. Portfolio management is no different. By diversifying return streams we are in effect adding a few more vitamins and nutrients to the portfolio. This by no means implies that we have permanently cracked it. We must constantly stay alive to new tastes and techniques. As the late famous chef Anthony Bourdain once said "without new ideas success can become stale".

References

  1. BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). BARCLAYS® is a trademark and service mark of Barclays Bank Plc (collectively with its affiliates, “Barclays”), used under license. Bloomberg or Bloomberg’s licensors, including Barclays, own all proprietary rights in the Bloomberg Barclays Indices. Neither Bloomberg nor Barclays approves or endorses this material, or guarantees the accuracy or completeness of any information herein, or makes any warranty, express or implied, as to the results to be obtained therefrom and, to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith. Source: Bloomberg Index Services Limited.
  2. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, endorsed or produced by MSCI. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.

Key risks

Investment risk

The value of an investment and any income from it can go down as well as up and can fluctuate in response to changes in currency exchange rates. Investors may not get back the original amount invested.

Aviva Investors Multi-asset Funds

Explore the fund range with our interactive tool.

Get started - launch tool

Need more information?

For further information, please contact our investment sales team.

Contact us

Related views

Important information

THIS IS A MARKETING COMMUNICATION

Except where stated as otherwise, the source of all information is Aviva Investors Global Services Limited (AIGSL). Unless stated otherwise any views and opinions are those of Aviva Investors. They should not be viewed as indicating any guarantee of return from an investment managed by Aviva Investors nor as advice of any nature. Information contained herein has been obtained from sources believed to be reliable, but has not been independently verified by Aviva Investors and is not guaranteed to be accurate. Past performance is not a guide to the future. The value of an investment and any income from it may go down as well as up and the investor may not get back the original amount invested. Nothing in this material, including any references to specific securities, assets classes and financial markets is intended to or should be construed as advice or recommendations of any nature. Some data shown are hypothetical or projected and may not come to pass as stated due to changes in market conditions and are not guarantees of future outcomes. This material is not a recommendation to sell or purchase any investment.

In Europe this document is issued by Aviva Investors Luxembourg S.A. Registered Office: 2 rue du Fort Bourbon, 1st Floor, 1249 Luxembourg. Supervised by Commission de Surveillance du Secteur Financier. An Aviva company. In the UK Issued by Aviva Investors Global Services Limited. Registered in England No. 1151805. Registered Office: St Helens, 1 Undershaft, London EC3P 3DQ. Authorised and regulated by the Financial Conduct Authority. Firm Reference No. 119178. In Switzerland, this document is issued by Aviva Investors Schweiz GmbH.

In Singapore, this material is being circulated by way of an arrangement with Aviva Investors Asia Pte. Limited (AIAPL) for distribution to institutional investors only. Please note that AIAPL does not provide any independent research or analysis in the substance or preparation of this material. Recipients of this material are to contact AIAPL in respect of any matters arising from, or in connection with, this material. AIAPL, a company incorporated under the laws of Singapore with registration number 200813519W, holds a valid Capital Markets Services Licence to carry out fund management activities issued under the Securities and Futures Act (Singapore Statute Cap. 289) and Asian Exempt Financial Adviser for the purposes of the Financial Advisers Act (Singapore Statute Cap.110). Registered Office: 1 Raffles Quay, #27-13 South Tower, Singapore 048583. In Australia, this material is being circulated by way of an arrangement with Aviva Investors Pacific Pty Ltd (AIPPL) for distribution to wholesale investors only. Please note that AIPPL does not provide any independent research or analysis in the substance or preparation of this material. Recipients of this material are to contact AIPPL in respect of any matters arising from, or in connection with, this material. AIPPL, a company incorporated under the laws of Australia with Australian Business No. 87 153 200 278 and Australian Company No. 153 200 278, holds an Australian Financial Services License (AFSL 411458) issued by the Australian Securities and Investments Commission. Business Address: Level 27, 101 Collins Street, Melbourne, VIC 3000 Australia.

The name “Aviva Investors” as used in this material refers to the global organization of affiliated asset management businesses operating under the Aviva Investors name. Each Aviva investors’ affiliate is a subsidiary of Aviva plc, a publicly- traded multi-national financial services company headquartered in the United Kingdom. Aviva Investors Canada, Inc. (“AIC”) is located in Toronto and is registered with the Ontario Securities Commission (“OSC”) as a Portfolio Manager, an Exempt Market Dealer, and a Commodity Trading Manager. Aviva Investors Americas LLC is a federally registered investment advisor with the U.S. Securities and Exchange Commission. Aviva Investors Americas LLC ("AIA") is a federally registered investment advisor with the US Securities and Exchange Commission. AIA is also a commodity trading advisor (“CTA”) registered with the Commodity Futures Trading Commission (“CFTC”) and is a member of the National Futures Association (“NFA”). AIA’s Form ADV Part 2A, which provides background information about the firm and its business practices, is available upon written request to: Compliance Department, 225 West Wacker Drive, Suite 2250, Chicago, IL 60606.