How fund operators can manage expectations around asset diversification
Rob Balkema, Senior Director and Head of Multi-Asset North America, Russell Investments, explains how multi-asset solutions work at the overall level of the fund.
Fund Operator Editor POSTED ON 6/9/2022 8:38:01 AM
The issues around multi assets being redefined based on what institutional investors are willing to consider as diversifying is a complicated manner that doesn’t have a clear answer.
In Clear Path Analysis’s report Fund Technology, Data & Operations, North America, industry leaders from companies including Pzena Asset Management, Russell Investments, and S&P Down Jones discuss multi-asset solutions and the problems around managing expectations on portfolio diversification.
“In my mind, every investor who is an asset owner is an asset investor in some way,” says Rob Balkema, Senior Director and Head of Multi-Asset North America, Russell Investments. “They are trying to solve an economic problem by bringing multiple asset classes together. If you are a pension scheme or a foundation, the end owner of those assets is a multi-asset investor. 40 years ago, this was a 60/40 split portfolio, and the bank would control the equities,” he explains and adds that, after this, an evolution followed, with multi-manager structures becoming more commonplace, leading investors towards a multi-asset solution.
"Your manager is trying to get an income of around 4-5% to prevent you running out of money in retirement. So, you want a total return that is greater than your income, and you withdraw that income and your balance declines overtime"
“Then came the evolution towards a single asset class solution that is more dynamic in form,” he says, which led to the fourth evolution, which was the most meaningful, “the outcome orientated products in the multi asset space.”
Income, for example, Balkema says, is an interesting area to look for outcome-orientated multi-asset solutions. “Here, your manager is trying to get an income of around 4-5% to prevent you running out of money in retirement. So, you want a total return that is greater than your income, and you withdraw that income and your balance declines overtime.”
According to a 2021 report from Aegon, more than 56% of advisers either “always” or “often” recommend multi-asset funds for their retirement clients.
Other areas include that Balkema lists as to where this causes an effect include the ‘target date space’ or the ‘[Defined Contribution] space’ where managers are trying to meet a target retirement date. “There are other areas that are income replacement or liability-driven, and many are outcome-orientated multi-asset solutions,” he says. “This is the evolution that is most intriguing, as it matches with the economic problem that we are trying to solve.”
“Our mantra is ‘improve financial security for people’, and a lot of times in this industry we talk so much about excess returns, or alpha, that we forget our other aim of solving an economic problem for someone”
Aegon’s report also said that 2022 was seeing a slowdown in multi-asset recommendations. “Use of multi-asset funds dropped back down after . The big change was in the share of advisers saying they ‘always’ use multi-asset or multi-manager funds – down from 23% to 9%. The share ‘always’ using these funds is up compared to 2020,” it said.
“At Russell Investments, our mantra is ‘improve financial security for people’, and a lot of times in this industry we talk so much about excess returns, or alpha, that we forget our other aim of solving an economic problem for someone,” said Balkema. He added that for retail investors, the key aim is to make the investments work for them so they can achieve ‘X’ retirement lifestyle and live comfortably. “Or maybe we want to meet the objectives of the foundation that are investing in the community,” he said. “The more alignment with the outcome, the more customisation is needed for the solution. And this is what I am most excited about in terms of the evolution of multi-asset.”
To see more of Balkema's interview, and to read the report in full, please click here.
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