Recent market events have highlighted these dynamics. Large swings in the price of oil and foreign currencies (primarily the Yuan) delivered a major hit to the US economy over the past 12 months, resulting in a decline in US corporate earnings. Equities and fixed-income, specifically high yield, felt the hit. But some multi-asset and macro-focused strategies had the ability to minimize or even take advantage of this environment. Why? As many multi-asset portfolios use a macro strategy, changes in the global economic trends are built into evaluation mechanisms. Depending on the risk management components, losses can be mitigated by adjusting asset class exposure—either by reducing exposure to energy equities themselves or to oil and oil-sensitive commodities.
In another dimension within the multi-asset universe, those strategies that are true global macro alternative types can actual short energy, which can offset risk during these times and potentially enhance returns. All that said, despite what the Fed does with interest rates this summer (or next) and how China’s currency is affected by that decision, multi-asset portfolios have additional tools to meet their objectives. With the wide proliferation of ETFs in recent years, implementing multi-asset exposure and tactical approaches to multi-asset allocation has become increasingly more efficient with ETFs.
Related: Value Stocks in Various Periods
Finding the right strategy can complement an overall portfolio and help keep clients on track and disciplined, even when markets get challenging. Of course, there are many approaches to multi-asset portfolio allocation. To separate the wheat from the chaff, it would be wise to query each strategist about the specific inputs and approach that dictates their outcome. For instance, “How did your strategy impact your approach when oil prices dropped?” This type of evaluation can glean insight into how a portfolio responds to asset movements, not just equities, and help you refine your portfolio to more effectively target your clients’ desired outcomes. Once you do, even Janet Yellen will likely envy your ability to ride the tides of global economic change. (Oh, if only a multi-asset portfolio could do the same for the Fed!)