It’s not all negative: The importance of diversifiers in multi-asset portfolios

2022 has been a difficult year for investors. High inflation, aggressive rate hikes and geopolitical conflicts have resulted in drawdowns across markets and traditional asset classes (such as stocks and bonds) have displayed high positive correlations, leaving ‘nowhere to hide’. However, despite the broad sell off across equity and debt markets during 2022, active managers that employ non-traditional and more differentiated strategies have been able to generate positive absolute returns.

This highlights the importance of active management during volatile markets. And the ‘Dynamic Core’ of Russell Investment’s managed portfolios enables this active management to occur within the model portfolio structure.

The Dynamic Core, also known as the Russell Investment’s Multi-Asset Growth Strategy Fund (MAGS), accounts for up to 35% of our core multi-asset managed portfolios offering. It allows our portfolio managers to use active management to modify portfolios in response to the movement of investment markets in real-time. In addition, it provides opportunities to gain exposure to institutional grade active managers, derivatives, and other securities that would otherwise be inaccessible to Australian retail investors due to platform restrictions. This is able to occur whilst leaving the model portfolio at the managed account level immune from turnover, creating an effective and efficient way to ensure our globally collaborative Design, Construct and Manage philosophy can be performed.

Allocations to alternative debt, absolute return equity and volatility strategies, hedge funds, commodities and futures have provided strong diversification benefits within the Dynamic Core during 2022 (to 30 June). Amundi Asset Management (Amundi), an absolute return world volatility fund, offers exposure to equity market volatility across U.S., Asia and the eurozone via options and variance swaps on indices. Amundi achieved +7.1% gross total return over the six months to 30 June 2022, providing strong downside protection during the first half of the year as markets sold off on heightened volatility. Exposure to alternative debt via Metrics Credit Partners Diversified Australian Senior Loan Fund, investing in Australian corporate loans and other debt instruments, achieved +2.0% over the six months, and Putnam Investment’s Systematic Vega strategy, which exploits volatility risk premia of realised versus implied volatility, achieved +5.0% for the six-month period to 30 June.

Click to enlarge the image

6 Months Total Return  to 30 June 2022

Despite positive correlations of traditional asset classes leading to broad sell offs across markets, the accessibility of differentiated active managers within the alternatives asset class has enabled exposure to positive returning investments during 2022, adding diversification benefits and demonstrating the importance of an actively managed portfolio approach.

Explore our Managed Portfolios