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Multi-manager View

”For the last 20 years, when a private investor has consulted their financial adviser, they would be asked if they wanted to own stocks or bonds or a mix. In more recent times, risk might have been quantified, volatility explained and the time horizon emphasised.

Most investors would have been told: “If you have a 10-year time horizon, put your money in equities.” If I had invested £1,000 in UK equities, represented by the FTSE 100 (with net dividends reinvested) for 10 years from the end of October 2001, I would have an annualised return of 4.6 per cent with net dividends reinvested and underperformed inflation after fees and income tax.

What the adviser did 10 years ago was to tell me to make one bet (stocks will go up), which had, on average, worked in the past. He did not think about the outcome I really wanted – to make money in a way that did not depend too much on market conditions. I was not looking for an answer to the question of how much I should put into equities or bonds.

Crucially, he did not think pragmatically about how to build a portfolio that would work in all seasons and that making only one bet was not the smartest way to achieve the desired outcome. Even if he had recommended a mix of 60 per cent equities and 40 per cent bonds, the portfolio risk would still have been dominated by equities, as historical equity volatility is more than twice that of bonds.

The key to investing over almost any period is being pragmatic and recognising it is impossible to predict with any certainty what the world will look like in 10 years. We need to invest in strategies that work in different growth and inflation environments, based on equities, credit, rates and commodities, long and short, to diversify risk and maximise the opportunity set.

Equities tend to perform in a rising growth and falling inflation environment while inflation-linked bonds perform better under falling growth and rising inflation.

Commodities tend to perform when growth or inflation rises, so an all-seasons portfolio needs to contain some of each. The investor is rewarded for taking risk in general, without the exposure of owning only one asset. Balancing the amount of risk allocated to each growth and inflation environment then diversifies the portfolio effectively. This can then be tilted to reflect the manager’s shorter-term prevailing views.

Multi-manager investing offers an opportunity to build a portfolio of specialist managers in commodities, equities, rates and credit, long-only and long/short. For example, a core risk balanced multi-asset fund complemented by active allocations to an emerging markets fund to capture growth where it can be found, a fund-amental credit fund to reflect the mispricing of many a corporate balance sheet, a commodity equity long-short fund and a macro fund which can capitalise on market volatility would have a much better chance of delivering the out-come I was looking for 10 years ago than investing in the FTSE.

Michiel Timmerman is chief investment officer at Ignis Advisers

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