For the conventional multi-asset manager, risk has been relative. How well has a portfolio of mixed asset classes performed on a risk-adjusted basis?
In bull markets (and the one that started in 2009 is no exception) it has not been difficult to give clients a decent return for a commensurate degree of risk, albeit based on historically derived measures of volatility and correlation. Unfortunately, when markets go into reverse, correlations become disconnected from historical norms, and everything trends towards 1.
In other words, everything goes down together. A cautiously managed fund with an allocation of 60% to bonds and 40% to “risk assets” (mostly equities but also some property, for example) may not turn out to be that cautious in a severe down draft.
Ironically, those that need greater returns, because very often their “pot” is insufficient to generate the income or gains they need, are forced to take on more risk, which has the potential to deplete their pot even further.
So now along comes multi asset absolute return offerings. These make more sense for the “cautious” approach, attempting as the do to limit the downside. Of course, the price that is paid is a limit to the upside, but for many folk who invest with a capital preservation mindset, that will be quite acceptable.
However, an issue with absolute return is that with markets in thrall to central bankers, who openly admit to market manipulation (they used to call it “guidance”), the playing field can be all uphill – in both halves! Nevsky Capital have just closed their hedge fund, and will be returning capital to investors, because they say they no longer understand the rules of the game. Other absolute return funds running multiple strategies will not be immune from the same problem. Stress testing based on past market tremors is barely relevant when the rules are in a state of flux.
Maybe the answer is to look at absolute return strategies on an asset class basis, and create a portfolio of individual funds; a combination of say equity market neutral and fixed interest funds (Henderson UK Absolute Return, Smtih &Williamson Enterprise and Old Mutual Absolute Return Government Bond, for example) along with a genuine multi asset fund that doesn’t require a Physics PhD to fathom out – like Church House Tenax Absolute Return Strategies.
It will require some work to look at the exact portfolio construction and to identify any unforeseen biases or unintended consequences, but in what could be a very volatile year for investors, it could be worth the time and effort. And if things get too tough, cash has always been a good starting point!
