Scott Wolle: One of the most common themes has been around the importance of liquidity — and the challenges of finding it during major market disruptions. Similar to the 2008 economic crisis, risk assets of all types experienced a sharp global sell-off as the potential human and economic toll of the COVID-19 pandemic became increasingly apparent. That initial broad market free fall seems to have stabilized, to a degree, after governments and central banks worldwide quickly stepped in with unprecedented fiscal and monetary stimulus responses1. However, the crisis has been a stark reminder that investors should always keep in mind where they can turn to quickly for liquidity in their portfolios when everything seems to be falling.
Highly liquid multi-asset strategies can provide a compelling choice in this type of uncertain climate by offering the potential to pursue steadier return streams with attractive upside beyond most typical traditional fixed income securities but without the drawdown exposures often experienced in equity markets. This can help provide investors with an expanded range of levers and a broader opportunity set to expand expected return consistency during strong and volatile investment environments. That, in turn, can help strengthen longer-term portfolio outcome potential across full market cycles.
P&I: How can multi-asset strategies work for risk mitigation?
Millar: The flexible nature of many multi-asset strategies allows for a shift away from specific market- and benchmark-driven performance to more absolute return and other outcome-oriented solutions that strive for greater control over risk exposures. A major advantage of these strategies is that they offer a way to increase potential portfolio risk efficiency with greater liquidity, transparency and cost efficiency compared to other popular alternative investment strategies such as hedge fund, private equity and venture capital investments.
P&I: What are some of the different ways these strategies attempt to shape risk exposures?
Wolle: The multi-asset segment includes a wide range of strategies, from traditional 60/40 balanced portfolios to more customized, sophisticated solutions. In terms of risk mitigation, let’s start with risk parity, in which allocations are designed based on volatility contribution rather than capital exposures.
In a traditional balanced portfolio of 60% stocks and 40% fixed income, history shows that up to 90% of portfolio risk would be generated by the equity allocation, which isn’t balanced at all. By contrast, our Balanced-Risk Allocation strategy optimizes allocations across equity, fixed income and commodity market exposures with the goal of each asset class contributing an equal amount to overall risk. It then adds a tactical overlay to help take advantage of current market conditions. Futures and other derivatives are used to gain efficient, highly liquid exposure to the three asset classes and up to more than 30 sub-asset classes.
Focusing on balancing risk contributions across these assets can offer a stronger economic diversification model. Stocks tend to do well in non-inflationary growth environments but can struggle during other phases of the economic cycle. Long-duration government bonds can offer attractive defensive attributes during recessions and crisis periods. Commodities can help defend a portfolio during inflationary growth periods. As volatility rises in one of these segments, capital exposure naturally decreases through a systematic monthly rebalancing of the portfolio’s strategic and tactical risk allocations. The goal is to deliver more consistent performance across the full economic cycle, with less risk than a traditional 60/40 allocation. Further, while the strategy’s returns are still expected to be linked to what is transpiring in the underlying markets, its methodical, disciplined use of risk targets has resulted in lower correlations to global equities and U.S. fixed income markets of 0.73 and 0.492, respectively, since inception3.
P&I: How can absolute return strategies work in today’s market environment?
Wolle: Absolute return approaches can vary widely in terms of philosophy and execution, offering investors a broad selection to help meet their specific needs and goals. For example, the Invesco Macro Allocation strategy utilizes some of the tools from our balanced risk allocation strategy, but significantly dials up the tactical overlay to be the primary driver of returns, representing approximately 80% of overall expected return. It also has the ability to invest in long and short positions, which allows the portfolio greater flexibility to seek positive absolute returns over complete economic and market cycles, with performance independent from broader capital market indices.
The strategy’s dynamic approach is differentiated from other absolute return approaches by its systematic use of risk premia exposures rather than alpha potential for portfolio allocation decisions. It starts with a risk-balanced core and then applies active tactical positioning based on directional and relative volatility trends. The result has been a unique risk/reward profile that historically has delivered consistently positive returns over longer timeframes, with attractive defensive attributes during difficult markets and uncorrelated behavior compared with traditional assets and other types of absolute return strategies.