At Russell, we call it multi-asset. Others might say outcome-oriented or solutions-based investing. Whatever your preferred term, it is a growing trend among institutional investors.
The point of multi-asset is to categorize a portfolio according to what it does – its goals – rather than according to what it is made of – the asset class. So, in a sense, this trend is really about a change of perspective.
And, as so often happens with a change of perspective, it can cause you to see other things differently, too. It can lead to a re-evaluation of things that have long been taken for granted.
For example: how should investment success be evaluated?
Today, most investment reporting is built around a single metric: performance relative to some market-based benchmark. That reporting is the basis of how most investors gauge their success and the success of their investment managers. But if a portfolio is really about what it does, not about what it is made of, then the market benchmark becomes less relevant. The objective of the portfolio, meanwhile, becomes more important.
When we look at things from this perspective, it starts to become clear that there are two questions being asked here. The first is: were the investor’s objectives met? The second is: did the investment manager do a good job?
As Charles Anselm and I argue in a recent Viewpoint, “These [questions] are clearly related, but they are not the same thing. Achievement of the investor’s objectives depends not only on how well the investment manager does, but also on factors over which a manager has no control.” And if there is more than one question to be answered, shouldn’t we be using more than one measure in our evaluation?
On that topic, my colleague Rob Balkema has a mantra: a benchmark isn’t an outcome. Standard industry reporting is not there yet, but his point is the investor’s objectives – the outcome – is one way to measure results, while performance against the market – the benchmark – is different. They play different roles in the evaluation of the success of the portfolio.
For example, suppose a multi-asset portfolio has the objective of a particular level of return – perhaps 6%, say – and the mandate offers the manager freedom to invest in a wide range of strategies against that objective. Over short time periods, success or failure against that objective will depend mainly on how markets move. It would have been a particularly easy target in any year from 2003 to 2006, for example. It would have been very tough to achieve in 2008. So the short-term evaluation of success is going to lean heavily on market-relative returns. But over the longer term, market fluctuations even out. So evaluation over longer time periods can be based more on how the portfolio did against its ultimate goal: in this case, the 6% return target.
Using multiple metrics as the basis of the evaluation process would represent a change for most investors. But I believe that is a sensible shift. Indeed, Charles and I even argue that for another type of multi-asset portfolio – a managed volatility strategy – no fewer than four metrics should be used in order to paint a better picture. After all, as we say in the paper mentioned earlier, “there are… very few areas of our lives where success can truly be measured on a single dimension. Are you good at your job? How was your last vacation? Is this [blog] helpful? While any of these things can be judged to be a success or a failure, the judgment is based on more than one input. In most situations, we human beings really don’t have that much of a problem with using more than one metric at a time”.
Multi-asset investing is a move away from a market-centered approach to investment, back toward a focus on the investor’s goals. As this move occurs, the way in which investors measure their results and evaluate success is going to change.