investment viewpoints

Multi-asset differentiators: tools for an agile climb

Multi-asset differentiators: tools for an agile climb
Aurèle Storno - Chief Investment Officer, Multi Asset

Aurèle Storno

Chief Investment Officer, Multi Asset

Over the past three years, many markets reached new historic highs, while suffering from extreme and sudden shocks. In this investment landscape, we see the journey being similar to a climbing expedition up an undiscovered cliff, with the search for return and yield being the ultimate objective. As the climber scales greater heights, uncertainty makes flexibility and agility key. The climber must ascend steadily, prepare for sudden turns in the weather and fragile surfaces, and maintain the discipline to never overreach.

We approach multi-asset investment from this perspective, highlighting the need for flexibility and diversification among markets, regions and implementation techniques to ensure our cross-asset strategies remain nimble and adaptable to changing macroeconomic and market conditions. 

We use a variety of tools to face new challenges, including portfolio 
insurance techniques such as drawdown management and convex strategies.

We use a variety of tools to face new challenges, including portfolio insurance techniques such as drawdown management and convex strategies. Drawdown management includes a variety of risk budgeting techniques that help us to size the portfolio’s total risk dynamically over time, with the objective of not losing more than a stated strategic risk budget1. Convex strategies include typically long volatility exposures (using VIX futures, options, swaptions, etc.) that gain from rising volatility, which typically occurs at turning points and when markets face sudden stress.

It is tempting to orient a portfolio towards a specific scenario or conviction; we believe it is wiser to ensure that it is equipped to deal satisfactorily with any future scenario and adjust to the ever-evolving investment landscape.

Strategic principles must firstly drive portfolio composition, in our view, whereas tactical signals should spur constant, but marginal and progressive, adaptations. That said, tactical shifts should never overtake long-term principles, such as diversification.


Rules are rules

An experienced climber consistently applies tested principles: before gripping the first hand-hold, they study the rock face, plot their route, study the weather forecast and triple-check their equipment. As investors, we believe that a systematic framework can provide a robust solution by sticking to clear rules, which are tightly monitored and challenged through continuous research. While history and experience guide us, we must beware of our behavioral biases and remain alert to surprises: overconfidence could be a worst enemy, while humility could be a best friend.

Bearing this in mind, we believe that portfolio insurance techniques should remain a strategic choice (not a tactical or timing feature) because our constant search for yield and return should not jeopardise our need for capital preservation1.

Our All Roads investment framework considers a set of very liquid investments across all asset classes: these are permanently invested and sized with risk diversification principles, as we believe that portfolio rebalancing should take into account changing market hazards rather than targeting static weights. The portfolio components are chosen with a structural perspective and differentiate between investments that can cope well in distinct circumstances – both from a macroeconomic perspective, such as the current growth and  inflationary forces, and among market dynamics, from shifts in trends, leadership and  relative yields.


All tools to hand

As the climber progresses and does not know what comes next, they must keep all tools in easy reach to help secure the next move. Dropping a tool, like removing an asset class from a well-diversified multi-asset portfolio, can lead to dreadful outcomes.

In the current environment, some investors are willing to drop government bonds, betting on inflation and rising yields. We would instead size and balance duration risk. Tactical tools such as risk models and momentum signals support actively re-sizing our exposure to government bonds over time. Other techniques balance risk in terms of finding diversifiers that work well when government bonds suffer. They include finding differentiated investments that could benefit from higher yields (like carry strategies), or inflationary forces (such as commodities), or yield shocks (long volatility exposures, for instance).


Cushioning falls to smooth the ascent

Climbing progressively and wisely also means securing one’s position to cushion against falls and protecting ground that’s already been conquered. The time-varying nature of risk premia, driven by economic expansions and investor biases, supports capital accumulation. Yet financial disruption from diverse (and often unexpected) economic shocks can trigger capital destruction. This can become permanent as human biases drive dangerous decisions when faced with stress and losses. Like the climber who locks rope into a new anchor, we seek investment techniques that help us to secure accumulated capital and smooth the path to a more stable return.

We believe that portfolio insurance techniques are the right answer, using a variety of signals to limit the cost often associated with insurance solutions. More than a decade of experience has informed our research and supported the integration of techniques to enhance our proprietary drawdown management principles. We continuously size the maximum loss the portfolio can tolerate relative to a given return target. We further adjust exposure using risk appetite indicators, monitoring the reliability of our models (with a lot of humility) and keeping track of the cost of insurance.

We believe that portfolio insurance techniques are the right answer,
using a variety of signals to limit the cost often associated with insurance solutions.

Drawdown management techniques have proven useful as markets suffer prolonged periods of losses. But evolving technology, among other factors, has generated an increased tendency for shorter and faster corrections over the past decades. In order to deal with sudden disruptions, we believe that convex strategies (for instance, going long volatility) should now be a structural component of portfolios, as well, making for a stronger investment anchor.

Lower yields in future could reduce the diversification potential of duration over time, for instance, leading us to believe that convex strategies could potentially become mainstream. That said, investors should be aware of the cost and potentially crowded nature of such positioning in the future. Diversification is also an important feature here, in our view, as we seek varied techniques across different assets and regions, using differentiated implementation.

Drawdown management and convexity techniques enable us to better limit downside risks, at a reasonable cost. The long-term benefit stems from typically superior Calmar ratios2 that underpin a pattern of more stable returns.


Disciplined, diversified and agile

In a world of increased uncertainty and abrupt change, many are eager to focus on predicting short-term trends. Yet, while tomorrow can be forecast with reasonable accuracy, next month and beyond are somewhat more ambiguous. We strongly believe a disciplined, diversified and agile approach can help make the climb safer despite the obstacles that will inevitably arise.



Capital preservation is a portfolio construction goal that cannot be guaranteed.
 Calmar ratios measure excess return by unit of maximum drawdown.

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