Navigating the beta gap

The role of multi-asset strategies in evolving markets

If 2020 has taught us anything, it is that long held assumptions can change quickly and investors must be positioned to respond when asset prices change. Looking ahead, the prospect of an even more prolonged period of low interest rates is likely to challenge investors’ ambitions to generate returns from traditional market betas alone. We believe multi-asset strategies offer an opportunity to broaden the available opportunity set, improve portfolio diversification, better balance risk exposures, and seek returns that may navigate the gap left by traditional beta exposures.

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Rethinking resilience from a multi-asset lens

The first few months of 2020 ushered in a historic period of equity and fixed income market volatility. Government bonds, despite their low yields, provided an important level of diversification to investor portfolios. However, the diversification benefits of government bonds were more muted than in prior market corrections given the low level of yields at the start of the crisis¹. With the low yield environment likely to persist, we believe investors may want to reevaluate how they are constructing resilience in their portfolios. This will require consideration of new approaches to help withstand a variety of adverse conditions and to achieve a variety of distinct outcomes—both on a tactical basis and strategically across cycles.

In this research, we use three case studies to illustrate how institutions are implementing multi-asset solutions in practice to meet the following complex investment challenges:

Enhancing nimbleness to navigate shifting market conditions

While strategic asset allocation decisions are an important investment decision for our clients, many have begun turning to tactical asset allocation capabilities to seek incremental returns over intermediate time horizons. A tactically oriented multi-asset portfolio can help improve risk-adjusted returns versus a strategic asset allocation. By combining multiple diversifying drivers of return, tactical strategies seek active returns by exploiting short-term investment opportunities.

Improve diversification through macro factor exposures

The desire for a portfolio that can perform well in a variety of market environments has led many investors to diversify their holdings across multiple asset classes and embrace strategies such as the traditional 60/40 allocation. But in recent years, it has become increasingly apparent that a portfolio that appears well-diversified across asset classes may not be sufficiently diversified across risk exposures. Macro factors capture broad, systematic risks that explain returns across asset classes, including economic growth, real rates, inflation, credit, emerging markets and liquidity. We’ve found that these six factors explain more than 90% of the returns across asset classes. By explicitly allocating to these factors, instead of asset classes, a balanced macro-factor strategy can avoid unintentional concentration in any single factor, as many asset classes share similar factor exposures.

Improve the opportunistic search for income

In the current low rate environment, the inability to earn a competitive yield in safe assets is likely to remain a consistent theme. Investors must choose between generating yield and stabilizing their portfolios, as securities that produce higher yield also tend to expose investors to greater, asymmetrical downside risk. A multi-asset approach to income generation can balance the tension between these two elements by focusing on yield per unit of risk.

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