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[Start investing] Maximising investment potential with multi-asset funds

18 Apr 2024

Reshma Moloo

Head of Multi Asset, HSBC Global Private Banking and Wealth 

Key takeaways

  • Multi-asset funds enable investors to access a diverse range of asset classes within a single fund, harnessing the potential of equities, bonds, cash and even non-traditional assets, such as infrastructure, convertible bonds and commodities.
  • Asset classes perform differently throughout a market cycle. Multi-asset funds provide diversification by spreading investments across multiple asset classes, helping investors to mitigate risks and enhance returns over the long term.
  • Historical data show that both equities and bonds tend to rally ahead of the first rate cut, making multi-asset funds an attractive option.

Multi-asset funds have emerged as a powerful tool for investors, enabling them to access a diverse range of asset classes within a single fund. These funds transcend the limitations of investing in a single asset class, sector or region, giving investors the flexibility to harness the potential of equities, bonds, cash and even non-traditional assets. These non-traditional assets can include infrastructure and real estate investment trusts, convertible bonds and commodities.

Multi-asset funds come with varying degrees of risk. At the lower-risk end, such funds tend to have a higher allocation to fixed income  Higher-risk funds, on the other hand, tend to have a higher allocation to equities. While lower-risk funds exhibit lower volatility and drawdown than higher-risk strategies, they typically offer less upside potential. 

The power of asset class variation

A key advantage of multi-asset funds is their ability to provide diversification. Multi-asset investing is based on the fundamental principle that asset classes perform differently across a market cycle. By allocating investments across a range of asset classes, investors can mitigate risks and enhance returns, optimising their investment potential over the long term.

Managing volatility and drawdown

Multi-asset funds are especially good for managing volatility and drawdown. By spreading risk across market segments, these funds seek to capitalise on the positive performance of certain asset classes  when others are losing value. This helps shield portfolios from significant losses and smooth out overall investment performance. In an ever-changing market landscape, the ability to manage risk effectively is valuable for investors seeking stability and long-term growth.

Adapting to market conditions

Actively managed multi-asset funds possess the advantage of adaptability. Skilled investment managers can dynamically adjust exposure to asset classes, capitalising on short-term opportunities and managing downside risks. For example, a manager may increase equity exposure while reducing bond holdings if they perceive stocks to be more attractive.

Why invest in multi-asset funds now?

Global interest rate hikes have made bond and equity valuations cheaper. As central banks begin monetary easing in response to moderating inflation, equities could benefit from improved sentiment and margins, while bond prices may get a boost from lower yields. Historical data also show that both bond and equity markets tend to rally ahead of the first rate cut. In such an environment, well-diversified portfolios could outperform cash in the next 6-12 months, making multi-asset funds an attractive option for some investors.

How might investors use multi-asset funds?

By outsourcing asset allocation to specialist fund managers, investors can benefit from their expertise. Rather than buying single stocks, specific asset classes or sectors, multi-asset funds are a cost-effective way to gain exposure to a wide range of investments. These funds can serve as a core allocation in portfolios, complemented by satellite allocations tailored to an investor’s preferences and objectives.

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