While investors appear to have rekindled their desire for multi-asset strategies, product providers have also been looking to both innovate and also move into new markets. Today Mercer tracks over 400 strategies within the multi-asset universe. The old labelling of “balanced” in the US and Asia and “diversified growth fund” in the UK is becoming redundant. Moreover, the range of strategies available to investors is increasing — for example, pushing the boundary between traditional and hedge fund investments in the liquid alternatives space, as well as providing access to specific risk factors, such as inflation.
As we stand back and look at the universe of managers, we believe that it is important to clearly identify the sources of risk and return in these products, as well as the potential role that they could play in an investment portfolio. To this end, we classify the various products into four broad categories:
- Core: strategies reliant on market returns to achieve the majority of their growth, making them suitable for investors that need a low-governance, all-in-one solution (for example, defined contribution pension investors).
- Risk parity: strategies that are, again, predominately focused on traditional markets for their performance, but which use leverage to make more use of lower-returning betas, such as exposure to interest rates/duration and inflation (typically via inflation linked bonds), in order to create a risk balanced portfolio.
- Diversified inflation: products that explicitly focus their portfolio on liquid real assets (listed property, commodity futures, etc.), balanced with investments in inflation-sensitive bonds; aim to generate growth, but with greater sensitivity to inflation
- Idiosyncratic: strategies that place a significant emphasis on tactical asset allocation and/or specific trade ideas to create a portfolio less reliant on traditional market returns, but still typically long-bias.
In this paper, we provide an overview of each type of strategy to further illustrate some of their typical characteristics; it is intended as a reference paper for clients doing (or considering) due diligence on one or more of these strategies.
Importantly, the suitability of any one type of fund will, however, depend on its objectives, constraints, and the manager’s approach (as well as the manager’s capability and skill in implementing the strategy).
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