Multi-Asset Strategies in Portfolio Management

Multi-asset portfolio management aims to reduce risk and increase returns by investing in various asset classes. This approach acknowledges that no single asset class consistently outperforms others. By diversifying across different asset types, investors can achieve a more balanced portfolio structure.

Multi-asset portfolios strive to enhance returns relative to the investor's risk profile through both strategic (long-term) and tactical (short-term) asset allocation. This return is typically measured by the Sharpe ratio.

Equities, bonds, and commodities form the core investment areas. However, portfolios may also include cash instruments and other funds. Especially during periods of heightened uncertainty, multi-asset strategy funds stand out with their balanced structure. It can be said that returns from single-asset class funds are highly variable and heavily dependent on timing, making them difficult to predict.

Multi-asset portfolio management aims to optimize asset allocation to meet specific investment goals. The key principles of this strategy are:

• Diversification: Spreading investments across different asset classes to reduce the impact of underperformance in any one class.
• Asset Allocation: Strategically allocating assets within a portfolio based on risk tolerance, investment objectives, and market conditions.
• Regular Rebalancing: Periodically adjusting the portfolio to maintain the desired asset distribution and reduce risk.

To build a successful multi-asset portfolio, it is crucial to first define investment goals and risk tolerance. Investors with higher risk tolerance may prefer long-term growth-oriented portfolios, while others may focus on capital preservation. The investor's age also plays a key role. Younger investors tend to accept higher risk, whereas those nearing retirement may prioritize preserving their savings.

Portfolios are generally constructed using one of the following three approaches:

• Risk Parity Approach: Aims to equalize the contribution of different asset classes to the total portfolio risk.
• Expected Return-Based Portfolio Construction: Attempts to estimate the expected return and volatility of each asset class, then builds a portfolio that maximizes the Sharpe ratio.
• Factor-Based Allocation: Involves deep economic analysis to identify prevailing factors such as value, momentum, and growth, which serve as the basis for investment themes.

Advantages of Multi-Asset Strategies:

• Reduced Portfolio Volatility: Low or negative correlations between asset classes help decrease overall portfolio volatility. For example, losses in equities during market downturns may be offset by gains in gold or similar commodities.
• Alternative Sources of Return: Provides opportunities to generate returns from non-traditional asset classes such as commodities and private equity funds in addition to equities and bonds.
• Strategic and Tactical Flexibility: Portfolio managers can make both long-term (strategic) and short-term (tactical) adjustments based on market expectations, actively shifting between instruments to enhance returns.
• Adaptability to Different Market Conditions: Portfolios can be structured to withstand unexpected developments, preserving returns under various market conditions.
• Capital Preservation: During risk-off periods, adding defensive assets (e.g., gold, cash) to the portfolio can help minimize losses.

Key Performance Indicators for Portfolios:

• Total Return: Overall gains from investments, including capital appreciation.
• Sharpe Ratio: A performance metric showing how well the return of a portfolio compensates for the risk taken.
• Alpha: The excess return of a portfolio compared to its benchmark index.

Historical data shows that multi-asset strategies have effectively fulfilled the role of portfolio protection, particularly during times of uncertainty. For example, losses in equities during the 2008 global financial crisis and the COVID-19 period were offset by gains in bonds and commodities. In today's economic environment, marked by trade policy uncertainties and regional conflicts, a cautious and balanced investment approach is increasingly important. Accordingly, diversified portfolios that include various asset classes offer a more sustainable and resilient strategy for investors.

The most effective way to manage your investments confidently, diversify your portfolio, and minimize risks is through the expertise of BV Portföy.