Diversification & Multi-Asset Investing

DIVERSIFICATION & MULTI-ASSET INVESTING

  • A multi-asset class, also known as a multiple-asset class or multi-asset fund, is a combination of asset classes (such as cash, equity or bonds) used as an investment.
  • Multi-asset class investments increase the diversification of an overall portfolio by distributing investments throughout several classes.
  • Many mutual fund companies offer asset allocation funds that are designed to perform according to an investor’s tolerance for risk.

Risk mitigation 

One of the most important concepts within investing is diversification; the practice of spreading your investments into different asset classes to help reduce volatility within your portfolio over time.

Risk & reward

One of the keys to successful investing is developing the ability to balance your appetite for returns with a realistic understanding of how much risk you can and should take. If you invest your retirement savings too cautiously at a young age you risk that your investments won’t grow in line with inflation, meaning that the real value of your savings will shrink over time. Conversely, if you invest your retirement savings too aggressively in your final years of employment you risk inflicting unrecoverable damage to your savings. This is because you will not have sufficient time for your investments to recover prior to the point at which you need to draw down from them.

Balancing risk & reward

One method used to balance risk & reward is creating a diversified portfolio which holds a basket of varying assets. In the earlier stages of your investment life cycle, you may be able to take on a significantly higher amount of risk by employing potentially more rewarding but equally more volatile assets; namely equities. As you approach the latter stages of your investment cycle it may be advisable you look to de-risk portfolio through the use of fixed-interest, alternative and liquid assets.

Multi-asset funds

One way in which clients can achieve diversification is through the use of multi-asset funds. Actively managed multi-asset funds are a relatively recent development in the asset management industry. Historically, the majority of funds available on the market operated with a strict investment mandate. For example, a US Large Cap fund could only invest in US Large Cap companies, if US companies struggled for whatever reason, the fund would most likely also suffer. Multi-asset funds have the ability to invest in any industry and geographical region. This approach relies heavily on market analysis, for example, if a fund believed US equities would struggle due to economic indicators they could reduce their weighting and opt for what they consider to be a more attractive investment. Multi-asset funds will often consist of a range of different asset classes across different regions providing investors with diversification. Different funds will operate with different objectives ranging from cautious to adventurous funds.