Fifty years ago, Deutsche Bank introduced its first multi-asset mandate into a private client’s discretionary portfolio.
Back in 1968, multi-asset investing was a simple allocation of funds between traditional asset classes such as equities, bonds and cash. Today, multi-asset strategies are more complex, allocating investment in a more targeted way across traditional asset classes, and also possibly including alternative asset classes such as commodities, real estate and hedge funds.
However, the basic principle of multi-asset remains the same: diversifying investment across multiple asset classes should increase the opportunity set available to an investor and increase likely returns for a given level of risk.
In practice, multi-asset investing works at two levels: strategic and tactical asset allocation. The former sets target allocations to try to capture medium and long-term investment trends. Tactical asset allocation, by contrast, is the active adjustment of allocations to each asset class held in the strategy in response to immediate market conditions.
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What we've learned from a half-century of multi asset investing
The global financial crisis of 2008 taught us many lessons. It became evident that, during such times, simpler methods of diversification could, on their own, no longer be relied on to produce acceptable levels of return.
This was because correlations between equities and bonds (and many other asset classes) increased during the crisis. In other words, these traditional asset classes began to behave in an unusually similar way to one another in response to rapidly changing market conditions.
This, of course, challenged the central rationale for multi-asset investing. Diversification relies on the belief that when one asset class is not performing well in particular market conditions, another asset class should be helping to maintain returns.
As financial markets have recovered, asset class correlations have fallen again, helping diversification to support portfolio returns. Even so, the financial crisis experience reminds us that simple static diversification on its own may not be an effective risk management strategy. Other approaches, sometimes including an increased use of tactical asset allocation, help ensure that our multi-asset investment process is a flexible tool that can respond quickly to market conditions, whilst continuously managing risk.
How we take a unique approach to multi asset investing
We have always thought of ourselves as risk managers at Deutsche Bank Wealth Management and continuous development of our multi-asset techniques over 50 years has enabled us to improve our ability to control risk on behalf of clients. For example, our ‘Risk-Return Engineering’ technology enables us to compare millions of hedging solutions with an underlying portfolio to identify the most efficient way to meet a client’s objectives within a given ‘risk budget’, i.e. the amount of volatility they are willing and able to tolerate in their portfolio over a given period.
Running a successful multi-asset strategy requires an extensive set of investment skills – far more than could be expected from one person – so our clients benefit from the fact that we have dedicated and experienced teams who provide the required skill set from overall strategic asset allocation, right down to individual stock and vehicle selection.
We are also able to access research capabilities and market specialists from our parent company, Deutsche Bank, a leading, global bank. Our global presence means our asset allocation process is informed by regional investment teams, each with an average investment experience of over 10 years, who ensure that regional allocations and investment implementation are tailored to meet local requirements. As the table below demonstrates, we leverage our local knowledge to best serve and meet the investment needs of clients wherever they are based around the world:
How does multi-asset help us tailor client portfolios to regional preferences?
“We have a close relationship and daily interactions with single asset class specialists in DWS [formerly Deutsche Asset Management] who are also based in Germany. We can leverage this insight in our multi-asset mandates and share with the other regions. We use a range of derivatives in our multi-asset strategies to help meet German client needs. For our region, important alternative asset classes include commodities, FX exposure and, in some cases, gold.”
Juri Kleschtschow, Portfolio Manager, Wealth Management Products, Germany