Multi-Asset Portfolio Management: A Comprehensive Guide

Managing a multi-asset portfolio has become increasingly popular among investors seeking diversification and risk mitigation. But do we really know what a multi-asset portfolio is and how to manage it?

Let’s start from the top.

A multi-asset portfolio consists of a diversified mix of different asset classes. Asset classes include equities, bonds, property, commodities and alternatives. The rationale behind a multi-asset approach is that different asset classes often react differently to economic and market conditions.

According to Modern Portfolio Theory (MPT), the construction and management of multi-asset portfolios have gained prominence as investors seek greater diversification and risk-adjusted returns. It is a pragmatic approach to investment selection that seeks to maximise total return within an acceptable level of risk.

Multi-asset investing adds a new dimension to your investment approach, allowing you to rely on different sources of returns. This strategy allows you to build a more robust and diversified portfolio by leveraging diversification across asset classes. Like a powerful and balanced orchestra, where the trumpets (equities), piano (bonds) and violin (crypto) harmonise, the synergy between these elements contributes to the overall strength and stability of the investment ensemble.

Why is tracking my multi-asset portfolio such a big deal?

But how can we compare the performance of a trumpet (shares) with that of a piano (bonds)? How can we judge whether we gain more harmony by adding a few violins (cryptos) or a contrabass (real estate) to the orchestra? And as you learn more about multi-asset portfolios, the question will arise: Why is tracking it such a big deal? The answer lies in the intricacies of investment management and financial goals.

• Alignment with financial goals: The portfolio stays in line with your objectives. Whether it's capital preservation, income generation or capital appreciation, monitoring allows investors to steer their portfolios in the desired direction.
• Performance optimisation: Evaluate each asset class's performance and the whole portfolio. This data-driven approach is fundamental to making strategic adjustments, optimising the portfolio for enhanced returns and aligning the investment strategy with evolving market dynamics.
• Risk management: Markets are dynamic, and asset values fluctuate. With vigilant monitoring, you can identify and address emerging risks on time. Whether it's a sudden market downturn or a change in economic conditions, proactive risk management is only possible by monitoring the portfolio and its performance.
• Diversification maintenance: The desired diversification across asset classes is maintained. You will reduce the risks associated with unexpected market movements by avoiding over-concentration in any single asset or sector and increase the agility needed to adapt to changing market conditions.

Which metrics should I track?

Analysing your portfolio, let alone someone else's, can be overwhelming. But it is easier and more effective if you know what you are getting for your money and the next step rather than blindly following it. So the trick is to know the next step: Track the metrics. Here are the 8 key metrics for rigorous multi-asset portfolio tracking.

Compound Annual Return (CAR)

Compound Annual Return (CAR) is a measure that shows an investment's average annual growth rate over a period of time, usually more than one year. It's calculated in a way that smooths out growth by considering the compounding of returns each year.

Why should I track it? The CAR is a representation of your investment. It shows you the big picture even if your investments fluctuate over time. It helps you understand the average growth, which makes it easier to compare with other investments or benchmarks.

Volatility

Volatility is the degree of variation in the price of an investment over time - like a roller coaster ride. It represents how wildly and quickly the value of an investment can go up and down. High volatility is a wild, unpredictable ride, while low volatility is a smoother, steadier journey.

Why should I track it? Tracking volatility is like checking the weather before a hike – it helps you prepare for how rough or smooth your investment journey might be. Knowing an investment's volatility lets you decide if it's too risky or just right for you, much like deciding on a hiking trail based on the weather forecast.

Sharpe ratio

The Sharpe ratio measures the portfolio's performance by evaluating the excess return (return above the risk-free rate) per unit of risk (volatility). A higher Sharpe ratio is like having a lemonade stand that makes good money no matter the weather, which is exactly what you want. A negative one indicates that the risk-free asset would perform better, suggesting inefficient risk management.

Why should I track it? It quantifies your portfolio's risk-adjusted performance, helping you make decisions and ensure an optimal balance between risk and return. In other words, it's about maximizing the 'bang for your buck' in investment risks.

Diversification

Diversification creates an investment portfolio with different asset types (cryptocurrency, stocks, bonds, real estate, etc.) to limit exposure to any single asset or risk. Just like carrying eggs in multiple baskets reduces the chance of losing them all if one basket drops, diversification helps protect your investments from significant losses.

Why should I track it? Tracking will ensure that you distribute your investment across different types of assets. Regularly monitoring diversification ensures your portfolio isn't overly reliant on a single investment type, which can safeguard against market fluctuations and potentially lead to more stable long-term returns.

Correlation

Correlation measures how closely the returns of two assets move in coordination. A correlation of -1 indicates perfect negative correlation (opposite direction), 0 indicates no correlation, and 1 indicates perfect positive correlation (same direction).

Why should I track it? A low correlation between assets suggests effective diversification, reducing vulnerability to systemic risks. Regular correlation analysis ensures that the portfolio remains diversified. If one investment goes down, another might go up or stay the same, which can help protect your overall money from big ups and downs.

Beta

Beta (β) measures a portfolio's sensitivity (volatility) to market movements, indicating its risk relative to the market. It shows how much an investment’s price moves compared to the overall market. The S&P has a beta of 1.0. Stocks with betas higher than 1 will tend to move with more momentum than the S&P 500.

Why should I track it? Understanding beta helps investors gauge how much the portfolio's value will likely fluctuate in response to market changes. Tracking beta is like checking how fast your car goes compared to the speed limit. If your car (investment) has a high beta, it speeds up or slows down more than the speed limit (market). If it's low, your car doesn't speed up or slow down as much.

Maximum drawdown

Maximum drawdown represents the largest loss an investment portfolio experiences from a peak to a trough before a new peak is achieved - measuring the biggest slide in a playground. It only measures the size of the largest loss - not taking the frequency. It tells you how big of a drop you might face in your investment's value.

Why should I track it? Knowing the steepest hill on your bike route is crucial to prepare for the possible risks that you might face. Market fluctuation is a fact, but if you prepare wisely and accordingly, you will be more comfortable with that level of risk or could prefer a safer path with smaller drops.

Tracking your multi-asset portfolio is just the beginning.

Monitoring your multi-asset portfolio is the starting point, not the destination. Beyond the numbers lies the need for ongoing adaptability. Financial markets are dynamic, requiring constant awareness and strategic responsiveness. It's not just about reacting to market movements; it's about proactively shaping your financial future. Regular review ensures that your portfolio remains a dynamic tool for achieving your goals. Think of portfolio tracking as the foundation for building a resilient and successful investment strategy.