Multi-asset investing: win some, lose some

How multi-asset investing works: Simply put, multi-asset investing involves investing in different asset classes such as equities, fixed income, cash and gold. Different asset classes behave differently under different economic and market conditions. Each asset class has its own performance cycle. Being diversified helps investors to take advantage of various market movements. In addition, multi-asset investing can help prevent portfolio volatility. A decline in one asset class can potentially be rapidly offset by a decline in another asset class. Over the long term, the importance of keeping a portfolio free of risk cannot be underestimated. When it comes to investments, at the beginning of any financial year, one cannot predict which asset class will perform better in that year (see graphic). The best a person can do is make an educated guess. It’s like guessing the winner at the start of a sporting event. Be it the FIFA World Cup winner or the asset class, the winners change every year. In the last five FIFA World Cups, we had five different countries lifting the cup; Brazil in 2002, Italy in 2006, Spain in 2010, Germany in 2014 and France in 2018.

Similarly, Indian equities outperformed in 2012, but 2013 was related to global equities. 2014 was a remarkable year for both Indian equities and fixed income. India’s fixed income outperformed its peers in 2015. Indian equities bounced back in 2017, only to falter in 2018. Instead, gold performed well in 2018 on a relative basis. In 2019, both global equities and gold were affected. It clearly shows, investors cannot predict how each asset class will perform on a year-to-date basis. Nor should investors indulge in such an exercise. The easiest option to avoid this is to invest in asset classes through a well-constructed multi-asset portfolio.

Mutual Fund Route: Mutual funds with different categories can be excellent tools for multi-asset investing. Particularly noteworthy are multi-asset allocation funds/funds of funds, in which investments are made across different asset classes: equities (domestic and global), fixed income, gold and cash, and in some cases, infrastructure investment trusts (InvITs). and Real Estate Investment Trusts (REITs). Apart from the convenience of investing in multiple asset classes through a single fund, investors also benefit from the fund house’s expertise in determining which asset class is best placed. Managing a successful multi-asset strategy requires practically all investment skills: from stock selection at the individual asset class level to asset allocation at the overall level. Since such execution requires multiple skill sets that are rarely found in a single individual, fund houses employ multiple expert teams to manage these. And all this is available at very low cost. For example, the ICICI Prudential Passive Multi-Asset Fund of Funds spend limit is 1%. As at the end of January, the portfolio’s exposure is 27.9% in domestic equity ETFs, 25% in foreign ETFs, 34.3% in domestic debt ETFs, 4.1% in gold ETFs and 8.7% in short-term debt etc.

Multi-asset investing is not a silver bullet. Instead, it aims to help investors buffer portfolio volatility while staying invested until the next boom. Finally, multi-asset investing enables investors to balance risk with reward, by allocating funds to both riskier and relatively safe assets. Also, from an investor’s point of view, it simplifies the investment process. Investors looking to achieve their financial goals would do well to recognize the benefits of multi-asset investing.

Adil Bakshi is Head of Corporate Communications at ICICI Prudential AMC.