Two recent articles in the Financial Times Fund Management (FTfm) highlighted the importance of the multi-asset investment approach to institutional investors. The first article¹ focused on the recent growth in third-party-managed multi-asset funds on the back of its risk management capabilities; while the second² provided an excellent illustration of its application through an interview with the manager at the University of Cambridge’s endowment fund. Both of these clearly resonate with us as they reflect a growth in support for our investment philosophy. However, these articles also highlight some nuances of this approach which are worth pointing out.
The first article chronicles the rise of dynamically managed multi-asset funds, also known as absolute return or diversified growth vehicles. The six largest of these funds have accumulated GBP32.8 billion of assets under management to date with the US version of the largest of these picking up USD1 billion since being launched in January.
These flows, it argues, have been driven by the institutional investors spooked by the toxic combination of the crash of 2008 and the ensuing high levels of volatility across all offshore asset classes. Multi-asset funds have provided a persuasive mix of limited downside while providing exposure to equity market movements.
An important point recognized in the article is the freedom that our approach offers from an investment perspective. As Toby Nangle of Threadneedle Investments says: “…in a multi-asset framework if you do not like something you do not have to hold it”. We are confused why more investors do not take advantage of this flexibility. Current conditions are, to be honest, very unusual by historical standards. Why make your investments decisions on a long view that is not necessarily representative at this point in time?
The other key insight identified in this article is that the risk management focus of these funds, while very attractive in volatile times, will always consign these sorts of funds to middle of the pack performance when compared with other funds. They quote Ciaran Mulligan, the head of manager research and selection at Buck Global Investment Advisers as saying that “(w)hat you will not see is multi-asset funds in general being bottom quartile. Instead they will be the in the second or third depending on the skill and sophistication of the multi-asset manager to make asset allocation decisions and avoid potential blow-ups or risks.”
We feel that this is an important insight for our clients and partners to realise. Like our international compatriots we do not attempt to maximize returns. Rather we focus heavily on limiting capital losses, thus maximizing the chances of us exceeding our real return benchmarks. The one caution the article brings up is valid too. With great flexibility comes the responsibility to be able to utilize it properly; i.e., correctly and consistently. You need a clearly stated and replicable investment process to do so. We believe we have exactly this.
The other article is a report of an interview with Nick Cavalla, the manager of the Cambridge endowment fund. He and his investment team pride themselves on their ability to be responsive and look for unusual alternatives. He took over management of the fund in 2007 and immediately felt that there were significant investment opportunities that the previous investment management team had missed. While 60% of the fund is invested in global equities, it also has exposure to more arcane areas such as illiquid credit strategies, direct lending (i.e. unlisted debt) and real estate holdings via mezzanine structures. Most of the debt exposure has come from exploring the investment implications of the deleveraging of banks. The one area where his approach does differ from his US university endowment counterparties is around private equity. He is not as exposed as they are currently. He feels listed equities offer better liquidity-adjusted returns.
It is always good to hear that other investment managers and investors agree with our multi-asset real return focused investment approach. While challenging to implement, this approach really is the only one that offers the flexibility you need to deal with a volatile investment environment; i.e., one that threatens the security of your capital and thus your ability to retire comfortably.
¹ ‘Future of ‘silver bullet’ funds lies in their low risk’, p.13, FTfm supplement, Financial Times, Monday, 19th November 2012.
² ‘Watchman of Cambridge fund keeps flexible but prudent’, P.4, FTfm supplement, Financial Times, Monday, 19th November 2012.
|The above data and research was compiled from sources believed to be reliable. However, neither MBMG International Ltd nor its officers can accept any liability for any errors or omissions in the above article nor bear any responsibility for any losses achieved as a result of any actions taken or not taken as a consequence of reading the above article. For more information please contact Graham Macdonald on [email protected]|