Nordea's Trolle Hansen: How multi-asset funds should navigate volatility
Robust risk management and diversification key
Asbjørn Trolle Hansen, portfolio manager of the Nordea 1 - Alpha 10 MA fund, talks to Lauren Mason about the importance of diversified portfolios and forward-looking strategies during the pandemic.
Why has the performance of multi-asset funds varied so much during the coronavirus turbulence?
The performance of multi-asset funds has varied during the coronavirus turbulence, depending on particular risk levels.
The ones targeting higher risk levels, which are therefore more tilted towards risky asset classes, have obviously lost more than those in the lower risk categories.
Nevertheless, the multi-asset funds at the lower end of the risk spectrum have also had troubles throughout the turbulent market environment in February and March.
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A contributing factor here is likely the low-yield environment, where bond returns have not been able to provide the usual diversification benefits many investors have been used to.
For instance, German bunds - a traditional save haven asset class - has performed poorly during the recent market turbulence.
Hence, in an increasingly complex market environment, it is getting more difficult for many investors to find diversification benefits.
Why do many multi-asset funds struggle during bouts of volatility?
In a pronounced low-yield market environment, paired with heightened volatility, the traditional diversification approach is no longer working well.
Aside from German bunds, which have been providing virtually no protection, US treasuries have only been able to moderately dampen the downturns of some multi-asset funds.
This means traditional multi-asset funds within the moderate to lower risk categories, which have performed well in the past, have run into difficulties with the higher volatility in the market.
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These funds also had to manage substantial liquidity-driven redemptions. Investors looked to significantly deleverage portfolios and everything liquid was sold and consequently suffered, exacerbating the meagre fund performances.
This is why robust risk management at the beginning of the investment allocation process, as well as a high focus on liquidity, are of paramount importance to us at all times - not only in periods of market crises.
Are we witnessing the limits of traditional mixed-asset funds?
Given growing uncertainties, paired with all-time high volatility and unchartered low yields, we believe traditional diversification is no longer able to protect investors to the extent they have been used to.
Traditional multi-asset approaches, to a certain degree, are being pushed towards their limits.
Since the establishment of our team in 2004, our investment process has not only adopted the typical method of asset class investing but, but also alternative diversifiers.
An increasing number of risk premia coming from the traditional investment space will be insufficient to master the increasingly complex market environment, so investors will need to focus more on alternative risk premia.
One example is currency-related risk premia. Attractively valued currencies can provide pleasantly defensive characteristics - the simplest example being the Japanese yen versus the euro.
We consider a broad and diversified set of different risk premia - typically around 20- 30, spread across strategy types and asset classes.
The historic stress test-like environment investors went through in March proved sound liquid alternative solutions were able to truly diversify - while duration was not.
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