Sunday, 23 November 2014
Last updated 2 days ago
Jul 17 2014 | 8:05am ET
Global investment manager Schroders has $446 billion in assets under management, $91 billion of which are in multi-asset strategies. Aymeric Forest oversees the firm's European multi-asset investment business as well as heading the firm's income solutions team and leading the $5.5 billion SISF Global Multi-Asset Income Fund. On the eve of the launch of a U.S. version of this fund, FINalternatives' Mary Campbell spoke with Forest about Schroders' approach to multi-asset investing.
What falls under Schroders' definition of “multi-asset?” Does it include alternative assets?
It's very much a definition [that includes] alternative assets. We try to cover the largest possible scope of asset classes and that goes from traditional bonds to traditional equities to high-yield bonds, emerging market assets...We also cover commodities, we also cover loans—for example, MBS, ABS—we can potentially invest, for some clients, in hedge fund strategies, so its scope is quite large.
You say Schroders takes a different approach to multi-asset investment than its competitors do, can you tell me about that?
The competition tend to look at asset classes the traditional way and look at, for example, the correlation of commodities with equities. What we try to do is to understand the components of each asset class...we call them risk premiums.
For example, a high-yield bond is composed of an equity risk premium; a term risk premium, which is a yield curve if you want; a liquidity risk premium; a volatility risk premium; a credit risk premium. And by understanding better the components of the asset class, or those risk premiums, we can try to analyze and understand what drives these asset classes.
When we build a portfolio, for example, a portfolio composed of equity and high yield, 50% equity and 50% high yield, you understand that when you look at it from a risk exposures point of view, you don't have a 50/50 [division], you probably have something like 70% equity risk and 30% to other risks.
How do you build a multi-asset portfolio?
What we offer are outcome-oriented solutions instead of traditional, balanced portfolios...Which outcome is our investor trying to achieve? What is his objective? This defines the portfolio construction approach...
Basically, we have five outcomes: wealth preservation, risk-controlled growth, income, inflation and capital preservation. I'm going to give you an example with wealth preservation.
Traditionally, if you were saying, 'Okay, I want to have a diversified portfolio, and to do that I can have 60% equity and 40% in bonds'...Actually, if you look at this portfolio in the risk space, you will see that the risk is dominated by equity so you end up with a portfolio that is not diversified. On the wealth preservation side, what we're trying to do is to build a portfolio that is made of four components of risk premium—a growth component, duration component (something that is interest-rate sensitive), an inflation component and...a fourth component that is...market behavior, and it [consists] of strategies.
Basically, we try to build a portfolio where the proportion of risk the portfolio is exposed to through these various components is relatively equal. In doing that we look at the correlation of those components and the correlation of those components is much more stable than [the] correlation between equities and bonds. When you combine those components, you have a more diversified portfolio and a portfolio that can resist shocks in various scenarios. And this is the starting point on the wealth preservation portfolio.
Then we have a second outcome that we call risk-controlled growth, where the growth component of the portfolio is being increased at the expense of the three other components... This outcome is for people who are looking for growth exposure in a diversified way. And we can do the same thing for inflation,...increase the inflation component at the expense of the others and it gives you an inflation outcome solution.
You say that multi-asset opportunities lie in more global, unconstrained investment strategies. Can you discuss this?
Let's take a very basic starting point which is, you want to receive a regular source of income, what do you do? You just buy domestic bonds. This is perhaps something that is sufficient [but] if the risk is too high compared to the income you receive, you need to invest in something else, so you need to start diversifying your portfolio trying to find alternatives.
If you find alternatives in other single-asset classes, you may take risks that do not correspond to your own risk profile—a risk that is not appropriate to what you're looking for or a hidden risk. I'll give you an example:
If you buy an ETF on the NYSE that invests in high dividend-yielding U.S. stocks, you're likely to buy an ETF that will own maybe 30-35% of utility stocks, which is what I call a hidden risk. Why do you have that? It's simply because of the way these indices are built up—they're going to just focus on the stocks that pay high dividends and that have high market-cap share. So, if you do follow a traditional approach you will buy something with hidden risk.
This is why we advocate first to be global, in order to try to benefit from the fact that economic cycles are not synchronized at the moment—we had a big sell-off in emerging markets last year, emerging markets are coming back in favor after their very strong devaluation. You need to find neglected areas, maybe in some small caps in Europe, for example, so you need to be global for that but you also need to be not constrained by these traditional indices because you might end up with concentrated risk. That was the example on utilities.
You need to be able to buy or sell asset categories that correspond to the objective or the outcome you want to achieve. I'll give you an example here: We sold U.S. investment grade at the end of January to buy European investment grade because in January we believed there was no value or little value left in the U.S. while in Europe there was very much value because we are in a deflationary environment as well. So we bought European investment grade. Now, at the moment, the value of actual European investment grade is really poor, so we're selling, taking profit and starting buying some Asian investment grade emerging markets. This is an example why you need to be flexible, why you need to be global to benefit from the dis-synchronization of the cycles, and why you need to be not constrained by...an index in order to avoid buying concentrated risk or hidden risks.
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