Multi-asset managers balance the risks to earn above-inflation returns

In complex and shifting economic times, multi-asset funds offer investors a simple way to make the most of opportunities while managing the heightened risks, fund managers argued at a recent investment conference.

Recent statistics show that unit trust investors have been favouring fixed interest and money market funds over multi-asset or balanced funds for new investments.

But Neville Chester, portfolio manager at Coronation, said investors are choosing the funds because they monitor the rand amount they have invested. Instead, they should focus on whether their investments are achieving inflation-beating returns.

In order to achieve above-inflation returns after tax, investors need to take some investment risk, he said. Taking risks can introduce volatility but in a multi-asset fund managers have more opportunity to minimise this volatility and deliver stable returns through exposure to different asset classes and managing the overall risk of the underlying investments.

Volatility is misleading

Chester says volatility is often used as a measure of risk, but markets can be at their riskiest when they are trending up with little volatility and at their least risky after a correction when volatility is high. During the great financial crisis in 2008, for example, markets were trending up when crazy lending practices were building up, he said. After the crash when shares had been sold down and measured as very volatile, the changes resulted in the market being at its least risky, Chester said.

As an investor, you need to appreciate that when markets are risky, managers need to take positions that are very different to the way the market is trending. And when the risk changes, your fund manager will be buying into the market because the risk has changed.

Taking these positions can lead to underperformance of benchmarks or peers – especially in a single asset class fund.

But in a multi-asset fund, underperformance of one part of the portfolio is easier for investors to bear as the part that underperforms is a subset of the bigger blended multi-asset fund that may still deliver good returns from other parts of the portfolio, Chester said. A resilient portfolio will have multiple divergent sources of outperformance of the market or alpha, he said.

Taking more risk

Managers of multi-asset funds who integrate the selection of securities across the asset classes can afford to take more risk in an asset class and earn higher returns than managers who are running single asset class funds, he argues. For example, a bond fund benchmarked to a bond index will have to own government bonds, while a multi-asset fund can exclude government bonds and include only corporate bonds, if it is of the view these are better investments, Chester said.

You can't take that level of aggression in a single asset portfolio because it creates too much volatility, he said.

Crossing asset class lines

Another benefit of a multi-asset fund is that it can invest in instruments that do not fit into single asset classes, such as convertible bonds which have been issued by the likes of Shoprite locally.

These bonds pay a return, but include an option to swop the bond for shares in the same company. It is therefore not a pure bond or a pure share investment, but it can be included in a multi-asset fund delivering bond like returns until the share price recovers and the time is right to exercise the option to convert it to equity, Chester said.

Assessing risks

An integrated multi-asset investment process also gives fund managers the ability to assess unintended exposure to risks when you combine asset classes, Chester said. For example, if you build a South African equity position it will most likely have a high exposure to the Chinese technology sector through Naspers/Prosus, so you don’t want to gain further exposure to this sector in your global equity portfolio, he said.

Similarly, a manager should consider the impact of local interest rates on, for example, holdings in South African shares that are highly exposed to the local market as well as your fixed income positions when deciding where to invest, he said.

The offshore vs local myth

Offshore markets are key to future returns, but also risky given the level of the US market, Mikhail Motala, portfolio manager at PSG, said.

Multi-asset funds used for South African retirement investments are often said to be constrained by their ability to invest only 45 percent in offshore markets, he added.

But what critics forget is that the JSE is in fact also largely a global market and managers should think deeper than just the JSE versus offshore markets, he said.

Motala said 49 percent of the South African share market is made up of rand-hedge shares that have high offshore earnings. This portion of the market is made up of resources shares (22 percent) that export commodities, such as gold and platinum, and large multinationals (27 percent) like Richemont, Naspers and Prosus.

While 51 percent of the JSE is made up of so-called SA Inc shares, many of these companies, such as SuperGroup, Discovery and Sanlam, TFG, Vodacom and MTN, are operating substantial businesses overseas, Motala said.

Integrating local and offshore

This highlights the need to evaluate investment opportunities beyond the simplistic JSE versus offshore classifications. Instead, a well-balanced portfolio should integrate both local and international assets to optimise diversification and risk management, Motala said.

He said it sometimes pays to get exposure to resources via the JSE, and sometimes it doesn’t. Some gold mining shares outperformed international ones between 2022 and 2025. But at other times it doesn’t pay – for example, offshore energy companies outperformed local producers over that same period.

It is not always clear where the best opportunities lie, so managers need to use all the tools they can to select shares locally or globally in an integrated manner, Motala said.

If you carve up the asset classes and offshore and local allocation, you can land up with 45 percent of the portfolio managed to outperform the MSCI World Index by investing in a highly concentrated portfolio.

New life for balanced funds

Early iterations of balanced or multi-asset funds were invested 60 percent in equities and 40 percent in bonds and were known as 60:40 funds.

Peter Kempen, head of distribution at Coronation, said 2022 was a year in which market commentators called the death of the 60:40 portfolio because global equities and bonds both performed poorly resulting in losses in these portfolios.

But subsequently these portfolios made a strong comeback resulting in returns for the decade still showing a positive real return in dollars.

Kempen said simple diversification across bonds and shares still works, but actively managed multi-asset funds can do more as they have more tools to use to enhance returns including:

• Listed alternatives to private assets such as infrastructure investments;
  
  
• Corporate bonds and other non-traditional opportunities that are not included in fixed income indices;
  
  
• Allocating to equities on the basis of valuations to reduce long-term risk

Complexity should not necessarily be avoided, but it makes more sense to give your manager the ability to take advantage of these opportunities on your behalf, all the while being conscious of the risks, Kempen said.