Jan 21, 2025

“A good portfolio is more than a long list of good stocks and bonds. It is a balanced whole, providing the investor with protections and opportunities with respect to a wide range of contingencies.”

— Harry Markowitz, American Economist and Developer of Modern Portfolio Theory

With a new year underway, asset owners and investment managers face uncertainty about what lies ahead. Investors across the globe will be monitoring multiple factors to ensure that their portfolios are nimble and prepared for whatever 2025 brings. These include the promises of AI and its impact on productivity and earnings and global political changes, including a new U.S. presidential administration and its ensuing policies.

Firms with multi-asset strategies will need to ensure that their asset allocation decisions and portfolios are well positioned for both their long-term objectives and to capitalize on new short-term opportunities in the market, while mitigating any unnecessary risk. These needs and the increasing complexity are straining the operating models of many firms as they struggle to support the front office and operational needs from a total portfolio view perspective.

Various Lenses, Similar Needs

Cutter Research members view the concept of total portfolio through many lenses. Asset owners around the globe (e.g., pensions, endowments, and insurance general accounts) may have different fund structures, broad asset class coverage, overlays performed at multiple levels, and various investment approaches (e.g., direct investments, third-party managers, funds, etc.). Still, all firms need to optimize how assets are allocated to preserve capital, increase returns, and meet their projected future liabilities.

Asset managers run multi-asset strategies that are much more complex than traditional balanced funds with fixed income and equity securities. These strategies can have complex structures with overlay portfolios with derivatives, multiple PMs involved in investing in various asset classes, and fund-of-funds structures with thousands of underlying constituent securities.

Whether you are an asset owner or asset manager, firms with multi-asset strategies need a complete and accurate total portfolio view with consolidated data and analytics for exposure and cash management. They also need accurate and timely analytics to assess risk and performance, along with integrated portfolio construction tools to support asset allocation decision-making, modeling, and forecasting.

Challenges and Opportunities

While firms with multi-asset investment strategies require the right data, analytics, and tools to make informed investment decisions, achieving this is easier said than done.

Aggregating data across asset classes is a top challenge, especially when that data comes from multiple sources in multiple formats. It can be difficult and time-consuming for firms to normalize and reconcile private and public holdings and valuations so that investment teams can view their positions from a top-down perspective to understand their positioning to target allocations and risk exposure through a factor lens. Obtaining underlying asset characteristics of private assets (private equity, real estate, infrastructure, etc.) is particularly fraught with the dual challenges of timeliness and transparency.

Firms also find cash management difficult. Some funds have multiple cash flows (e.g., subscriptions and redemptions, margin calls, capital calls) coming in and out daily. Asset owners must account for longer-term liabilities, in addition to regularly scheduled and ad-hoc cash flows that will impact cash available for investments. Firms might selectively allocate capital to underlying sleeves and managers, others might take a rules-based approach that passively allocates capital through an algorithm, while some may use a combination of both techniques. In addition, an overlay portfolio using derivatives is typically leveraged to quickly fine-tune portfolio allocation while maintaining desired risk levels and managing factors like currency exposure or tactical positioning without disrupting the underlying existing investments.

Asset allocation is a complex process with many moving parts. When we last covered this topic in 2019, we found that most firms (70%) did not use a vendor system designed specifically for asset allocation. Many used Excel spreadsheets with proprietary systems. Others found ways to force asset allocation and multi-asset class portfolio construction tasks onto vendor solutions designed for public markets and direct investing in fixed income and equity securities.

Because multi-asset strategies have grown increasingly more complex, firms would be better served by moving to a vended solution built with the market's intelligence and can leverage the latest technology at scale. In time, we expect these vendors will not only help to reduce some of the complexity through automation, but also incorporate AI into their solutions to answer questions related to performance, risk, or composition, and help firms identify behavioral bias or assist with tactical allocation decisions and optimization. In 2025, more firms will move away from spreadsheets and manual processes to create a total portfolio view and enhance their asset allocation process for multi-asset strategies.