COVID-19 has just rung in the next round of low yields, which has prolonged the perilous balancing act between risk and return for multi-asset investors as they strive for the dual goal of steady returns and capital protection. Designed as all-weather, one-stop-shop investment solutions providing a smooth ride through market uncertainties, successful multi-asset portfolios master the art of correlation management with the aim of optimizing the trade-off between risk and return.
However, some multi-asset strategies are moving away from their invincible core allocation of equities and developed-market sovereign bonds for additional yield pick-up in the corporate, emerging market and other higher-yielding fixed income spaces. This asset allocation shift has come at the expense of diversification and, therefore, crisis resilience. As the needs of a post-COVID economy are likely to keep interest rates low for a significant amount of time, multi-asset strategies will continue to face the challenge of balancing yield and risk. This will continue to drive the need for strategies able to generate returns while applying enhanced risk control measures to manage volatility.
Traditional strategies holding on to static, capital-based allocation concepts that are often fraught with behavioral biases are likely to struggle1, whereas modern multi-asset strategies following a systematic and risk-based approach to allocation can provide the solution. This is because these portfolios are able to combine equal risk contributions from all portfolio components with precise volatility targeting, while making tactical allocation adjustments based on unbiased market views, resulting in improved Sharpe ratios. Ultimately, they enable investors, despite challenging market regimes, to stick with what is probably the most convenient way of allocating capital: multi-asset investing.
1. To learn more, read our paper “Know yourself, conquer the markets: How knowing these 3 behavioral biases can lead to investment success”.