Building robust multi-asset portfolios is not a game of chance. We explain how expertise is a key pillar of our MAF Core range.
Diversification can be a critical factor in delivering robust long-term outcomes for investors. All else being equal, a globally diversified portfolio that encompasses a range of assets and strategies should prove more robust than a less-diversified alternative, especially during challenging economic and market environments.
But there is more to it than that. A successful multi-asset fund is not a random collection of different securities and asset classes; it encapsulates a set of convictions and ideas about corporate, economic and environmental, social and governance trends. The art of building portfolios is to ensure these cohere in a way that minimises risk and maximises opportunities.
That requires expertise, which is the first pillar of our approach in our MAF Core range. We have a long track record and deep resources in this area – we’ve been managing multi-asset portfolios for over four decades, have a dedicated team of 45 professionals and can draw on the insights and expertise of Aviva Investors’ capabilities across geographies and asset classes. Currently, we run around £98 billion in portfolios for Aviva and our external clients.
In addition to deep resources and a long track record in managing multi-asset portfolios, we believe expertise in our MAF Core range comes through our approaches to portfolio construction and risk management.
A different approach to building a multi-asset fund
We don’t follow the crowd by outsourcing our asset-allocation framework to a peer-group benchmark or third-party provider; instead, it is designed in-house by a large and dedicated global team with decades’ worth of experience in multi-asset investing. This frees us up to create an asset-allocation framework built on a more comprehensive set of methodologies than the average multi-asset solution.
Our asset allocation model is global. With teams spanning 14 countries, providing 24-hour on-desk coverage, we have a broad and deep understanding of all major asset classes across the investment universe.
This enables us to create truly diversified portfolios free from a potentially unwarranted and unhealthy home bias. A global approach should achieve a better risk-adjusted return over the longer term than a portfolio too concentrated in any one region.
Furthermore, traditional asset allocation models tend to split capital between equity and fixed income: simply put, to increase risk they allocate more to equity, and to reduce risk they allocate more to fixed income. But a strategy that treats all fixed income as low risk and all equities as high risk is outdated – after all, global high-yield or emerging-market debt can often behave more like equities than investment-grade bonds.
To create effective diversification and enhance risk-adjusted returns, we divide assets among two categories: Growth and Defensive. Growth assets have the potential to drive the portfolio’s growth – they include equities and riskier forms of fixed income. Defensive assets are held to protect the value of investments and manage risks: these include cash, government bonds and lower-risk corporate bonds.
As you move from MAF Core I (the lowest-risk fund in our offering) to MAF Core V (the highest-risk fund), the allocation to growth assets goes up and the allocation to defensive assets goes down.
Our Asset Allocation Committee brings together MAF portfolio managers, the investment strategy team and fund managers from individual asset class teams to review funds’ positioning and to ensure it remains relevant to current market conditions.
While we believe our approach is robust and sustainable, that doesn’t mean we never need to tweak the composition of the MAF Core range. Research shows that having the wrong asset allocation poses a threat to investment performance. So, although MAF Core is designed to be as simple as possible, with our long-term asset allocation calls doing the heavy lifting, we regularly review our asset allocation. This ensures we can adapt and change positioning when necessary.
Risk is about more than just volatility
Many traditional asset allocation models rely heavily on historical data to build and manage funds – but history doesn’t always repeat. This is why we use forward-looking metrics, combining historical data with proprietary expected-return projections to guide our decisions. This approach means we can incorporate recent market trends and forecasts and develop a framework relevant to current market conditions, as opposed to long-term historical averages.
Similarly, where many other funds use volatility as the primary measure of risk, we seek a more holistic view. While volatility can be a useful metric, it has significant limitations as a risk indicator. Volatility measures show variations around the mean; in other words, a high level of volatility will show large movements in the value of the asset from one day to the next, while low volatility will show smaller movements. But volatility doesn’t capture how much money an investor could lose in a tail-risk event, like the global financial crisis, COVID-19 pandemic or the war in Ukraine.
By incorporating tail risk into our analysis, we can gain a better understanding of what really drives risk and return. We also look at the funds’ exposure to various factors to understand if we hold any unintended biases. We use stress testing and scenario analysis to understand how susceptible our funds are to interest rate changes, inflation shocks and market sell-offs.
Being prepared for all eventualities
Success in multi-asset portfolios over the long term is not down to chance. Expertise is not a given. It requires resources, experience and robust processes – just some of the qualities we believe help our MAF Core range stand out from the crowd.
Key risks
For further information on the risks and risk profiles of our funds, please refer to the relevant KIID and Prospectus.
Investment risk
The value of an investment and any income from it can go down as well as up and can fluctuate in response to changes in currency exchange rates. Investors may not get back the original amount invested.
Emerging markets risk
Funds may invest in emerging markets; these markets may be volatile and carry higher risk than developed markets.
Derivatives risk
The funds may use derivatives; these can be complex and highly volatile. Derivatives may not perform as expected, which means the funds may suffer significant losses.
