Multi-asset strategies for volatile times

Global balanced portfolios of equities and bonds have done very well in recent months, but the outlook for both asset classes is deteriorating, said Michael Sager, vice-president and client portfolio manager with CIBC Asset Management.

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A worsening macro environment does not bode well for equities. Slowdowns in China and Germany will be followed by weakening growth in the U.S. and Canada, he said in a Sept. 28 interview.

“Everywhere, the cyclical macro environment is weakening. Consequently, expected equity returns have also deteriorated,” Sager said.

Last month, new International Monetary Fund managing director Kristalina Georgieva said a “synchronized global slowdown” will result in slower growth for 90% of the world this year, bringing growth to its lowest point since the beginning of this decade.

For fixed income, Sager said: “Continued historical performance has been good, but it’s come at the expense of much weaker future performance.”

Given the outlooks for both fixed income and equities, he said investors need to look elsewhere “for a diversifying source of returns.”

For Sager, that means multi-asset strategies.

Multi-asset strategies combine investments in traditional asset classes, commodities, and currencies with hedge fund strategies, he said, but with greater liquidity and lower fees.

The strategies can improve expected returns by diversifying away from the risks inherent in global balanced portfolios, he said.

Where does that diversification come from? For starters, currencies and commodities are driven by different fundamentals than equities and bonds, he said.

Also, multi-asset strategies’ combination of long-only, long-short, beta and idiosyncratic alpha provides different investment horizons, from multi-quarter to holding for a few weeks.

“Different horizons give you different information,” he said. “Different information gives you diversification.”

The strategies also employ different methods of evaluating information.

“Quantitative strategies are great because they value assets today relative to their history, but they’re essentially backward-looking,” he said.

“The great benefit of including qualitative judgment into a process is that you can be much more holistic, draw on many more fundamentals, but also be forward-looking.”

The diversification that comes with multi-asset strategies’ mix of assets, horizons and methods can improve the “smoothness” of expected returns, Sager said.

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