Analyst Viewpoint

Multi-asset sophistication outstripping the pace of traditional investment technology support

A second tier of asset allocation has shifted focus from the portfolio level to more tactical asset allocation at the investment level and - in recent times - been labelled multi-asset.

While the concept of multi-asset class investments has been around for many years, they are steadily growing in popularity since the sub-prime crisis. Structured to leverage better returns while increasing diversification and reducing portfolio and investment risk, it is easy to understand the attraction. With languishing returns in listed securities, more and more portfolio managers are adopting more sophisticated multi-asset strategies.

Investment managers with multi-asset strategies are striving for better returns and unique offerings in the competitive multi-asset fund space. Even the definition of multi-asset is evolving as the components that it can be comprised of are still blossoming and the creativity portfolio managers are bringing to the mix is pushing the envelope.

Many investment managers are crossing the chasm from listed securities to private investments to try to create more sophisticated structures in their strategies. The multi-asset space that is emerging is a long way from where it started and is a far cry from traditional single-class investment strategies.

While the investment structures for multi-asset structures are becoming more sophisticated at a rapid pace, for most firms the technology to support the needs of these complex hybrid investments is not. Many portfolio managers are forced to use Excel to manage and monitor their investment structures with the consolidated ‘look thru’ and transparency capabilities they need for these listed and real asset hybrid structures. For multi-asset managers using Excel, they may be reducing portfolio and investment risk, but by using Excel as their technology source they are likely concurrently increasing operational risk.

For multi-asset managers using Excel, they may be reducing portfolio and investment risk, but by using Excel as their technology source they are likely concurrently increasing operational risk. 

Many firms do not have corporately supported investment management platforms that have the capacity to manage both listed and private assets on one platform. As multi-asset class investments that combine public and private investments continue to grow, this deficiency will create more operational risk as managers resort to Excel to have consolidated views of the investment details they need to manage and monitor their positions.

Monitoring multi-asset structures with listed securities is challenging, as asset classes outperform/ underperform at different times and no asset class will outperform during every type of economic cycle. Assessing the performance and viability of these structures requires the ability to dissect them into their individual components as well as assessing the health of the strategy as a whole.

As multi-asset investments transcend equities and fixed income to include derivatives and real assets, the complexity to monitor and evaluate ongoing investment risk increases greatly. This is further complicated by comingling liquid/market priced listed securities with illiquid/privately priced private assets. For many managers, the only place they can assemble their complete portfolio is in Excel, as the official book of records is fragmented over multiple systems.

As rates of return for listed securities individually continue to underperform, multi-asset strategies striving to outperform will grow. To keep operational risk, compliance and investment monitoring in check, firms need to invest in consolidated platforms that are asset-agnostic to ensure they are well positioned to support the business for these hybrid investment structures going forward.