Standard Life Investments

Published Article

Investment Adviser - Multi Manager Column


"I mean if you put all of your eggs in one basket, boy, and that thing blows up you’ve got a real problem.” (Jerry Bruckheimer)

I was recently looking at a table showing the performance of different asset classes over the last decade and two points struck me. The first was the sheer volatility of returns from one year to the next and the second was the difficulty in trying to predict the timing of these returns. Amid the current economic uncertainty, this problem is as evident as ever. Take government bonds for example – at the start of this year, a number of respected fund managers took the decision to be underweight in gilts and treasuries. They were vociferous in their argument that these bonds were expensive, with yields looking unattractive relative to high rates on inflation. On top of that, the majority of market commentators were expecting interest rates to rise.

In reality in the UK, gilts have turned out to be one of the best performing asset classes year to date, outperforming equities, corporate bonds and property. The economic environment has deteriorated and interest rates are likely to remain unchanged for some time yet. Against this backdrop, investors have felt that it was worth continuing to pay up for the relatively safe haven of government bonds. Few however predicted this. Even some of the world’s leading bond fund managers didn’t get it right, although several have since changed their stance.

Of course when strong views are taken on an asset class, the results can be very painful when the position goes wrong. For example, a number of funds have been in the news recently because they have been hit hard by the drop off in the price of gold. And it isn’t just gold; other metals such as silver and copper have fallen by around quarter over recent weeks. The dollar meanwhile was the best performing currency in September - the month after the US received its first ever credit rating downgrade. It would have taken a sage of extraordinary talents to predict these movements and most fund managers are not blessed with such qualities. This is why, in my opinion, it is fruitless trying to outsmart the market in any one asset class. Diversification is not exactly an original investment concept but in the current environment, one does well to remember its benefits.

The diversification offered by multi-asset funds is one of their chief attractions. For these types of funds, diversification isn’t just about adding more stocks, it’s about getting as great a mix of contrasting investments as possible. Combining a wide variety of asset classes, funds, strategies and styles means that no one area is allowed to decimate performance. The upside, of course, is therefore limited too but the trade-off seems worth it to me. The economic environment is highly uncertain; the financial crisis has evolved into a sovereign debt crisis and the process of working through this is going to be long and complicated. We should expect continued market volatility due to the risks of policy errors and political disturbances in a world of debt leveraging. My conclusion is that the risks are great enough at the moment without taking large bets on any one asset class.