Multi-asset perspectives: despite a challenging year, demand remains buoyant

By Andreas Zingg, head of multi-asset solutions, Vanguard, Europe

Despite the performance challenges of the past year, multi-asset strategies are in high demand, as a growing number of advisers uncover their cost-efficient, long-term advantages.

Across Europe, multi-asset solutions are among the fastest growing sectors in the management industry, and are forecasted to grow more than 8% per annum¹. In Italy and Germany in particular, multi-asset funds are growing rapidly, and currently account for 32% and 28%, respectively, of total fund assets in the two countries².

For many advisers, multi-asset solutions provide compelling value when compared to the complexity and costs of constructing and managing individual client portfolios in-house. As more advisers shift their focus towards financial planning and enhancing client relationships, they’re leaving asset allocation and security selection in the hands of asset managers and discretionary fund managers (DFMs).

Broader industry trends are also fueling interest in multi-asset solutions, including an increasing awareness of costs among advisers and clients, tighter regulations around suitability and transparency, and a growing desire by clients to exert more control over their investment risk and outcomes.

With Europe and the UK expected to enter a recession in 2023, multi-asset solutions can help diversify risk across different assets, sectors and countries, which historically has helped smooth out returns in times of volatility. In the UK, Germany, Italy and Switzerland, multi-asset funds are expected to grow 5% annually, from $1.3 trillion in 2022 to nearly $2 trillion by 2030.  Demand for outsourced model portfolios is expected to be even stronger, increasing by an estimated 15% annually, from $360bn in 2022 to more than $1.1tn by 2030. Across Europe, the vast majority (85-90%) of model portfolios are still managed in-house; however, the trend is growing among advisers to outsource the management of their MPS assets, especially in the UK market.

Sources: Associazione Del Resparmio Gestito, Bundesverband Deutscher Investmentgesellschaften, Investment Association, Swiss Fund Data, Boston Consulting Group, Vanguard. Data are in USD.

Why bonds still matter

Much of the focus this year has been on the poor performance of bonds, and their impact on multi-asset strategies.  The steep drawdowns during the second and third quarters were the worst on record, with global bonds falling nearly 17% since the start of the year³.

Crucially for multi-asset strategies, bonds spent most of 2022 simultaneously declining alongside shares. As a result, multi-asset investors have seen little diversification benefits from holding bonds over the short-term. Double-digit inflation and aggressive rate hikes are primarily responsible for the dual decline in shares and bonds; however, we believe a more traditional relationship between the two asset classes will reassert itself over time, and bonds will once again play a stabilising role in multi-asset portfolios.

Simultaneous declines are more common than we think

Historically, simultaneous declines in shares and bonds over short periods of time are not that unusual, as the chart below shows. Since 1995, the monthly nominal total returns for shares and high-quality bonds have both been negative around 13% of the time.  

Source: Vanguard.
Notes: Data reflect rolling total returns for the periods shown, and are based on underlying monthly total returns, with dividends and income re-invested, for the period 1996 to 2022. Global shares are represented by the FTSE All-World Index and global bonds are represented by the hedged Bloomberg Aggregate Index. Returns are in GBP.

Extend out the time horizon, however, and the chances of both asset classes simultaneously falling becomes more and more unlikely, with investors never encountering any three-year span of negative returns across both asset classes (and barely encountering it over any one-year period). In short, holding a diversified portfolio of asset classes remains an effective tool for managing risk over the long term.

The good news is that multi-asset portfolios have typically recovered quickly after these periods, with 60/40 portfolios taking an average of nine months to recoup their losses. Thinking about the current market, we expect 60/40 strategies will take closer to 24-36 months to fully recover in value, given the severity of the losses⁴.

The enduring value of strategic asset allocation

As economic and market conditions change, it can be tempting to take a more tactical approach through active shifts in asset allocation. Yet short-term responses can have an adverse impact on client portfolio, which can lead to imbalances that leave them less prepared for future market conditions—and ultimately can result in poorer outcomes.

Time and again our research has shown that strategic allocation continues to outperform tactical strategies, especially over longer timeframes, providing investors with higher average nominal returns and a greater level of certainty (lower distribution of outcomes).

Tactical vs strategic allocation strategies: distribution of returns over various time periods

Source: Vanguard calculations using data from Morningstar, Inc. Data is for the period 3 January 2011 to 31 December 2021. Notes: Performance calculated on a NAV-to-NAV basis. Returns calculated in USD with income reinvested and net of fees.

Brighter outlook for multi-asset strategies

Looking ahead, our outlook for multi-asset portfolios continues to improve. According to the VCMM, Vanguard’s proprietary forecasting tool, the estimated 10-year return for a 60/40 portfolio has significantly increased since the end of last year, from 3.5% in December 2021 to 6.6% in September 2022⁵. Although inflation and recessionary concerns will mean market volatility is likely to continue, multi-asset strategies should eventually benefit, with higher interest rates on bonds providing more meaningful levels of income and lower equity valuations offering more attractive entry points for upside growth. 

At Vanguard, all our multi-asset strategies are designed to provide advisers with simple, clear, low-cost building blocks that can be used on their own, or as the core of a well-balanced and diversified portfolio for individual clients. As market conditions change and industry trends develop, our strategic multi-asset solutions rely on time-tested principles that have served investors well for many years. 

¹ Source: Boston Consulting Group. Based on projected annualised growth estimates for the period 2021 to 2026. Includes assets under management in mutual funds and multi-asset solutions. For more details, please see “Global Asset Management 2022: From Tailwinds to Turbulence”, May 2022.

² Sources: Associazione Del Resparmio Gestito, Bundesverband Deutscher Investmentgesellschaften. Data as of June 2022.

³ Calculation based on the total returns of the Bloomberg Global Aggregate Index USD  (unhedged) as at  1 January 2022 and 30 November 2022. All income is assumed to be reinvested. Calculations are in USD.

⁴ Vanguard calculations, based on data from Robert Shiller’s website, for the period 1920-September 2022. Based on historical performance data for the S&P500 and 10-year US Treasury, based on linear duration approximation. Returns calculated in USD with income reinvested. ‘Recovery’ defined as time taken for portfolios values to reach initial investment value ($1).

⁵ Source: Vanguard, using VCMM data as at 31 December 2021 and 30 September 2022. Calculations reflect estimated 10-year returns for a 60/40 portfolio comprised of: UK equity (MSCI UK Total Return Index), global ex UK equity (MSCI AC World ex UK Total Return Index GBP), UK bonds (Bloomberg UK Aggregate Index) and global ex UK bonds (Bloomberg Global Aggregate ex UK Index Hedged GBP). UK equity home bias: 25%. UK fixed income home bias: 35%. Home bias assumptions in line with Vanguards’ multi-asset portfolio investment strategy. Returns include income reinvested. Calculations are in GBP.