The world has always been an unpredictable place for investors, and it has become more so over the past five years. Digitisation is partly to blame. News can travel from one side of the planet to another in seconds. The news can then be manipulated and redistributed in a heartbeat, sometimes with devastating consequences. Digital technology has also accelerated the pace of change across the economy. Start-ups powered by AI are reaching revenue milestones once thought impossible.
Y Combinator (the start-up accelerator known for backing Airbnb and Dropbox) recently said its latest batch of tech start-ups was growing at 10% per week, an unprecedented rate in a start-up venture. Most of these companies would have had to hire large teams of expensive human coders a few years ago. But today, 95% of the code has been written by AI.
These digital changes are coming at a time when populist political parties have upended the global political order. Donald Trump’s global trade war has disrupted trading networks established over decades and threatened the dollar’s status as a safe haven. Furthermore, the world’s largest countries are drowning in debt, severely hampering their ability to respond to future crises.
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Multi-asset trusts offer added protection
Against this backdrop, it is worth considering the place of multi-asset trusts within a portfolio. Maggie Fanari, CEO at J. Rothschild Capital Management, the manager of RIT Capital Partners (LSE: RIT), notes that multi-asset trusts such as RIT “offer investors access to differentiated global strategies, hard-to-reach assets, and long-term structural themes, making them highly complementary to most portfolios… A multi-asset approach gives us the ability to respond decisively to shifting macroeconomic conditions across a market cycle.”
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Multi-asset trusts also provide investors with an added layer of protection through diversification. “Diversification is famously the only ‘free lunch’ in finance,” says Alastair Laing, CEO at CG Asset Management and co-manager of Capital Gearing Trust (LSE: CGT).
The closed-ended structure of an investment trust is perfectly suited to diversification and multi-asset holdings, some of which are likely to be illiquid. “Our permanent capital base gives us a structural advantage, enabling us to maintain conviction in high-quality investments… ride out short-term volatility, and allocate meaningfully to less liquid opportunities,” says Fanari.
Of course, investors could build their own multi-asset portfolio – encompassing assets such as bonds, equities, gold and even exposure to illiquid assets, such as private equity and renewable energy – via investment trusts. However, this comes with another set of risks. “This requires significant effort and could be tax-inefficient if capital gains tax is crystallised each time rebalancing occurs,” explains Laing.
Investors pay a fee for a trust’s portfolio management, but they’re paying for the managers’ skill. There are also tax benefits, as the assets remain within the trust. A trust such as RIT also provides exposure to somewhat exclusive private-market themes. “We also benefit from access to specialist managers,” says Fanari. “These specialist partners value our long-term, patient capital.” All of the big multi-asset trusts, Capital Gearing, Personal Assets (LSE: PNL), RIT and Caledonia Investments (LSE: CLDN) offer something slightly different, with the latter more focused on private equity. Capital Gearing and Personal Assets have also favoured a more defensive approach, focusing on bonds (mostly inflation-linked), gold and equities.
Personal Assets’s co-managers, Sebastian Lyon and Charlotte Yonge, say the investment team’s views in recent years have been “shaped by an expectation of regime change”. Inflation, government debt, shifting political sands, economic uncertainty and technological change have created a “world of greater uncertainty, higher inflation and a bond bear market, which began in the summer of 2020. Thus far, the 2020s are looking very different from the 2010s”.
The managers have shifted the portfolio away from risk assets to “ complementary asset classes that may offset falls in equity markets”. They’ve also reduced exposure to the US dollar “as investors increasingly question the dollar’s position as the world’s reserve currency”. Instead, Personal Assets has been adding to its yen holdings. Index-linked bonds play a key part of the wealth-protection strategy for Capital Gearing and Personal Assets. “We consider that the role inflation-linked bonds play in a fiat monetary system is the same as the role gold played under the gold standard – that is to say, the closest asset class to risk-free,” says Laing.
Charlie Morris, the founder and chairman of ByteTree, argues that investors should go one step further. “Hold bitcoin for return as it catches up with gold as a reserve asset, and gold as a hedge. I believe the risk-weighted combination of the two assets is the optimal approach for asset allocators. In my opinion, gold is the reserve asset for the real world, and bitcoin is the reserve asset for the internet.”
Having a small amount of bitcoin in a portfolio has been a sensible decision for the past few years. It illustrates why it’s reasonable to consider a range of assets across a portfolio. Multi-asset trusts can take some of the effort out of this decision-making process. Not all investors will be comfortable with this approach, but it’s worth considering. The goal of a multi-asset portfolio is to reduce risk and volatility via diversification and enhance long-term returns.
“The pain of losses [outweighs] the joy of profits, which can lead to poor investment decisions,” says Laing. “By investing to avoid significant drawdowns, investors can protect their portfolio against their poor, emotion-driven decisions.”
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