Since 1968, Deutsche Bank has used multi-asset strategies to help diversify private client portfolios. The main objectives of minimising risk and maximising opportunity remain the same, but with half a century of experience we have become more sophisticated about how we achieve them.
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 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 asset allocation; 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.
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.
Correlations vary over time and, 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. Active management is key.
Approaches that include 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 approach 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 service has provided expertise in the design and implementation of systematic downside protection solutions for more than 10 years.
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.
Marcel Hoffmann, Head of Wealth Discretionary, Germany
“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. For our region, important alternative asset classes include commodities, FX exposure and, in some cases, gold.”
Deepak Puri, Head of Wealth Discretionary, Americas
“A broad based, multi-asset portfolio construction approach means our clients who are primarily based in the Americas (including Latin America) and use the US Dollar as a reference currency have various ways to try and meet their portfolio objectives. Historically, the concept of multi-asset was limited to US stocks and bonds, but since the 1980s that has evolved and now encompasses a broad range of asset classes like US high-yield corporate bonds, emerging market debt and hedge funds. The CIO view on these asset classes has given our portfolio managers the necessary risk/return framework to manage customized, multi-asset portfolios in an effective manner.”
Stéphane Junod, Head of Wealth Discretionary, EMEA
“Our clients are often global investors. The challenge in EMEA is running multi-asset strategies across various jurisdictions, which each have their rules and regulations, and using four currencies: the dollar, Swiss francs, the euro and sterling. Our strategies have a global overlay, but we tailor them depending on the preferred currency and the locality of the client.”
Tuan Huynh, Head of Wealth Discretionary, APAC
“In Asia, the mentality amongst our clients is distinctive. We have a lot of entrepreneurial clients and the tolerance for short-term loss is much lower than in other parts of the world. As a result, the focus of our multi-asset offering is more on absolute return, seeking to make a positive absolute return for clients, as opposed to strategies designed to outperform a particular benchmark. This trend is evident in other regions, but most prevalent in Asia.”