Multi-Asset Class

What Does Multi-Asset Class Mean?

Multi-asset class is a phrase used to signal that an investment is made up of a combination of asset classes (such as cash equivalents, equities, or bonds). A multi-asset class investment, or investment strategy, always contains more than one asset class, which creates a group of assets that adds diversification to a portfolio. The weights given to each asset class and the types of asset classes are usually established based on an investor’s personal preference.

How Multi-Asset Classes Work

Multi-asset class investments increase the diversification within an investor’s portfolio by distributing all available capital throughout several asset classes. Multi-asset class investments, therefore, reduce the volatility of investing compared to having a large concentration in a specific asset class.

However, it may also reduce overall returns because some asset classes are normally negatively correlated, meaning that as one gains value, the other will lose value. Due to this phenomenon, if one asset class outperforms the other asset classes, it may have to ‘pay’ for some of the inherent losses of the portfolio.

Types of Multi-Asset Class Investments

There are several types of multi-asset class investments, including:

1. Personal portfolio

Investors with enough capital may choose to become their own asset manager and build a multi-class portfolio. Family offices also exist to provide their clients with personal asset allocation based on the investor’s preference.

2. Risk tolerance funds

Many mutual fund companies offer multi-asset class funds that are designed for an investor’s perceived risk tolerance. Aggressive funds would have a higher equity allocation, while a conservative fund will have a higher allocation in safer assets.

3. Target date funds

Some companies offer multi-asset class investments that change asset allocations according to a specified time horizon. For example, if an investor is retiring in 15 years, the fund may have a higher allocation of equities in earlier years, but shift to safer assets as the fund gets closer to its target date.

4. Hedge funds

Hedge funds utilize a multi-asset class to their investment approach through investing in both traditional and alternative asset classes.

Several other multi-asset class investments are available to investors; the major advantage of such investments is that they provide diversification to an investor’s portfolio.

Benefits of Multi-Asset Class Investments

There are several benefits that multi-asset class investments can provide to an investor, such as:

1. Seek to generate returns while managing risk

Multi-asset class investments offer investors exposure to a wide range of asset classes, sectors, investment strategies, and individual security exposure. This provides diversification to an investor’s approach to investing, which mitigates some of the unsystematic risks inherent to the market.

2. Target specific and measurable investment objectives

Unlike balanced investments, multi-asset class investments are not measured against a benchmark. A multi-asset class is focused on a specific investment object, such as a target return.

3. Dynamic management

Multi-asset class investments are designed to navigate market shifts through tactical trades and exposures. It is flexible to respond to changes in the market and often tries to seek greater returns by using tactical allocations.

4. Potential to quickly adapt to underlying market conditions

Multi-asset class investments, which are often actively managed, can quickly change their exposure to a certain asset class, sector, or security more quickly than traditional investments. As such, it provides an investor with the ability to adapt to changing market conditions.

5. Provides access to top-class investment managers

Multi-asset class investments can provide an investor with access to some of the world’s best investment opportunities and investment managers.

Drawbacks of Multi-Asset Class Investments

There are also some drawbacks to multi-asset class investments, including:

1. Negatively correlated assets

Some asset classes that are included in a multi-asset class investment are negatively correlated – meaning when one goes up, the other goes down. As a result, the investor may not always reach the maximum return that may be offered from other portfolios.

2. No say in investment strategy

Most investors do not possess enough capital to invest fully in the asset classes they want, so they invest with a portfolio manager. In such a situation, while an individual may want to place their money in a specific sector, the portfolio manager is not obligated to follow the same strategy.

More Resources

CFI is the official provider of the global Commercial Banking & Credit Analyst (CBCA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful:

• Dynamic Asset Allocation
• Balanced Fund
• Portfolio Manager
• Investing: A Beginner’s Guide
• See all wealth management resources