Stan Verhoeven, lead portfolio manager in NN Investment Partners' factor investing team, tells Incisive Works how "building block" approaches to diversification can help.
For the next couple of years, uncertainty is king. Investors are worrying about the end of the economic cycle and quantitative easing, a possible bear market in equities, and geopolitical events such as Brexit and the US-China trade war. But will fretting about headlines help them earn decent long-term returns?
NN Investment Partners' Stan Verhoeven thinks not. He argues investors distracted by short-term events should refocus on long-term return targets by building more diversified portfolios.
Diversification in any portfolio is most critical in uncertain times. But investors need to focus on the effect any additional investment has on their existing portfolio, rather than simply making sure that any new fund they add is diversified in itself. Traditional investor portfolios are often already biased towards long equity and fixed income.
Multi-asset funds shouldn't add to those concentrations. Instead, Verhoeven argues that multi-asset funds should be portfolio "building blocks" that target attractive absolute returns, on the one hand, and diversification in relation to traditional investments, on the other. "So we make sure our Multi Asset Factor Opportunities (MAFO) fund has no long bias towards equities", he says, or indeed towards fixed income or any other asset class.
MAFO applies a factor-based investment approach and harvests factor premia across a variety of asset classes including commodities - an asset class outside the stamping ground of most traditional multi-asset funds.
The nice thing about commodities, says Verhoeven, is that while equity markets are dominated by speculators, commodities markets attract additional participants such as producers managing risk and end consumers. In effect, MAFO, through investing, provides services such as market liquidity, to these participants and receives a return compensation for facilitating this.
MAFO doubles up on diversification by applying multiple factor strategies across the various asset markets based on value, momentum, carry, flow and volatility. Factor strategies often have low correlations to traditional investments and low correlations to each other.
Click here to learn more about NN Investment Partners' "building block" approach to portfolio diversification and their Multi Asset Factor Opportunities (MAFO) fund
Investment is subject to risk, including the possible loss of the money invested. Diversification does not ensure a profit or protect against a loss. Past performance is not a reliable indicator of future results. Currency movements can affect your investment returns. For more detailed information about the NN (L) Multi Asset Factor Opportunities fund, please refer to the prospectus and Key Investor Information Document available at www.nnip.com.
This is a communication issued by NN Investment Partners B.V. (the "Company"), a Dutch limited liability company registered as an overseas company (registration number FC032623) and as a branch (registration number BR017698) in the register of companies for England and Wales, with its registered address at 25 Old Broad Street, London EC2N 1HQ. The Company is authorised by the Netherlands Authority for Financial Markets and subject to limited supervision by the Financial Conduct Authority. Details about the extent of our regulation by the Financial Conduct Authority are available from us on request.