Alpha found: Comparing active multi-asset managers with a passive model


Ideas for portfolio strategies and concluding thoughts

With any investment strategy, understanding how to use it in a portfolio is an essential decision. The challenge with multi-asset funds is no different, but it is often regarded as a greater burden given that the typical multi-asset fund does not fit cleanly into any one investment style box. Despite this difficulty, investors are still utilizing multi-asset funds across portfolios in a variety of ways.

Some investors have carved out a specific "flexible/tactical/swing" component of the portfolio, which is not dissimilar to what they would do with a U.S. large-cap or international equity portfolio sleeve. The goal of this specific sleeve is to allow the managers to make the active calls for decisions such as favoring stocks versus bonds, small cap versus large cap, or one country versus another. The shifting allocations of this sleeve will be the main lever that repositions the broader portfolio.

Others use one or multiple multi-asset funds as the "core" of a portfolio, sometimes accounting for 40%–60% of the overall portfolio, and allocate the remaining capital to traditional style-box and/or opportunistic investment strategies. Some investors even use multi-asset funds as an entire portfolio, opting to outsource investment capabilities to a "third-party" manager.

Outside of the more tangible uses of multi-asset funds in portfolio construction, there are other more abstruse strategies. For example, recent increased regulatory burdens can make the appeal of multi-asset funds more intriguing. Larger investors, such as but not limited to institutions, have more recently placed a greater emphasis on partnership with the professional money managers they hire. These partnerships often facilitate open dialogue around investment-related ideas and research.

The debate over the effectiveness of active portfolio managers and their ability to produce positive alpha over time is far from over. Whether or not leadership reverts to active managers, investors can have confidence in the power of diversification as an investment strategy. Building a portfolio that is allocated across multiple asset classes, while no guarantee of investment success, can help stabilize returns across a variety of economic environments. Investors often choose to decide a portfolio's asset allocation themselves, and the results produced by this decision may be difficult to assess.

Stand-alone multi-asset funds have been around for decades, and professional multi-asset managers in many cases have spent their entire careers understanding how asset classes interact with one another, and how each asset's performance has historically varied across cycles. Is it possible that this understanding and added flexibility can translate into a meaningful improvement on benchmark portfolios? The results of the preceding analysis suggest that multi-asset funds on average have produce positive risk-adjusted performance over time.

Advisors should consider taking the opportunity to discuss multi-asset funds with their clients and the possibility of incorporating them into their overall portfolio allocations. Advisors would be able to point to a positive performance record of active multi-asset strategies as well as the diversification that the funds provide.

The results of the preceding analysis suggest that multi-asset funds on average have produced positive risk-adjusted performance over time.


Christian J. Galipeau

Senior Investment Director

Christian Galipeau
Brendan T. Murray

Senior Investment Director

Brendan Murray
Seamus S. Young, CFA®

Investment Director

Seamus Young

Find out more about Putnam's active approach to multi-asset investing and the performance achieved by our long-tenured Global Asset Allocation team.

Important disclosures: The Bloomberg Barclays Intermediate U.S. Aggregate Bond Index is an unmanaged index of U.S. investment-grade fixed-income securities with remaining maturities of one to ten years.

The MSCI EAFE Value Index is an unmanaged index that measures the performance of equity securities representing the value style in countries within Europe, Australasia, and the Far East.

The Bloomberg Barclays U.S. Corporate High Yield Bond Index is an unmanaged index that measures the USO-denomi­nated, high-yield, fixed-rate corporate bond market.

Russell 1000 Index is an unmanaged index of the 1,000 largest companies in the Russell 3000 Index. Russell 2000 Index is an unmanaged index of the 2,000 small companies in the Russell 3000 Index.

S&P GSCI Index is a composite index of commodity sector returns that represents a broadly diversified, unleveraged, long-only position in commodity futures. You cannot invest directly in an index.

The views and opinions expressed are those of the authors and Putnam Investments, are subject to change with market conditions, and are not meant as investment advice.

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