Money
Multi-asset investing: Win some, lose some
Summary
- Investors can’t predict how each asset class will perform on a y-o-y basis
2020 and 2021 were stand-out years for equity investors, with markets surging northwards. Making money seemed like a cakewalk; all one had to do was get invested. Not only did equity emerge as investors’ favoured asset class, but several people also went overboard with the equity allocation in their portfolios. However, that strategy seems to have come undone in 2022. Equity markets have fallen from their record highs. Also, volatility has become the order of the day. For many, this has come as a harsh reminder of the importance of diversification. While investing, diversification is no less critical than selecting the right avenues, a multi-asset approach is key to successful investing.
How multi-asset investing works: Simply put, multi-asset investing entails investing across various asset classes such as equity, fixed income, cash, and gold. Under varying economic and market conditions, different asset classes behave differently. Each asset class has a performance cycle of its own. Being diversified enables investors to benefit from different market moves/cycles. Furthermore, multi-asset investing can aid in curbing portfolio volatility. A decline in one asset class can potentially be offset by an uptick in another asset class. Over longer time horizons, the importance of de-risking the portfolio cannot be overstated. When it comes to investing, at the start of any financial year, no one can predict which asset class will outperform that year (See graphic). At best, what an individual can do is make an educated guess. This is akin to guessing the winner at the start of a sporting event. Be it the FIFA World Cup winner or the asset class, winners keep changing every year. Over the past five FIFA World Cups, we had five different countries lifting the Cup; Brazil in 2002, Italy in 2006, Spain in 2010, Germany in 2014 and France in 2018.
Likewise, Indian equity excelled in 2012, but 2013 belonged to global equities. 2014, was a noteworthy year for both Indian equity and fixed income. India’s fixed income outshone its peers in 2015. Indian equity staged a comeback in 2017, only to falter in 2018. Instead, gold clocked a good showing in 2018 on a relative basis. Both global equity and gold impressed in 2019. This clearly shows, investors can’t predict how each asset class will perform on a year-on-year basis. Neither should investors indulge in such an exercise. The easiest option to circumvent this is to invest across asset classes through a well-constructed multi-asset portfolio.
The mutual fund route: Mutual funds with their diverse categories can be excellent tools for multi-asset investing. Particularly noteworthy are multi-asset allocation funds/funds of funds, wherein investments are made across various asset classes: equity (domestic and global), fixed income, gold, and cash, and in some cases, Infrastructure Investment Trusts (InvIT) and Real Estate Investment Trust (REITs). Apart from the convenience of investing in multiple asset classes through one fund, investors also gain from the fund house expertise of determining which asset class is favourably placed. Practically all investment skills one can think of are required for managing a successful multi-asset strategy: from stock selection at individual asset class level to asset allocation at the overall level. Since such execution requires multiple skill sets which are rarely found in one individual, fund houses employ multiple specialist teams to manage these. And all this is available at a very low cost. For example, ICICI Prudential passive multi-asset fund of fund expense is capped at a maximum of 1%. As on January month-end, the portfolio has exposure of 27.9% to domestic equity ETFs, 25% to foreign ETFs, 34.3% to domestic debt ETFs, 4.1% to gold ETF, and 8.7% in short-term debt, etc.
Multi-asset investing is not a silver bullet. Rather, it is intended to help investors buffer portfolio volatility while staying invested until the next upturn. In conclusion, multi-asset investing enables investors to balance risk with reward, by allocating monies to both risky and relatively safer assets. Also, from an investor’s perspective, it simplifies the investment process. Investors would do well to recognize the benefits of multi-asset investing in the quest for achieving their financial goals.
Adil Bakshi is Head of Corporate Communications at ICICI Prudential AMC.
