Regular readers may recall that I sometimes like to derive investment lessons from scuba diving. If nothing else, it’s easier to justify a trip to a faraway ocean if you can convince yourself the jaunt is partly for research purposes.

I was recently lucky enough to visit Australia’s Great Barrier Reef. It was genuine bucket-list stuff for me. Yet work is never far from my mind – of course! – and even the realisation of this long-held dream made me think of investing.

While I undertook a deep dive, my wife and children confined themselves to snorkelling. It’s therefore right to say I was more adventurous, but it doesn’t automatically follow that I had the better experience.

The problem is that depth brings darkness. The further down you go, the more the water filters out the reef’s extraordinary colours – as a consequence of which the corals and fish don’t have the magnificent vibrancy they possess closer to the surface.

In a strange way, then, I got the less satisfying deal. Sure, I kind of secured the bragging rights, because what I did was ostensibly more thrilling – but the rewards weren’t manifestly superior.

It’s also worth remembering that snorkelling is notably safer than scuba diving. So in the end I took more risk and didn’t have as much fun as those who plumped for the less perilous option.

By now you’ve probably formed a rough idea of where this is going. The specific parallel I want to draw here is with the myriad choices available in the sphere of multi-asset investing.

Surface appeal versus real-world utility

As I wrote earlier this year, more and more investors are rightly recognising the appeal of multi-asset solutions. Market volatility has delivered a stark reminder that diversification – both across asset classes and within them – is still of huge importance.

Yet diversification needn’t entail complication. The search for “something different” has led many investors towards complex alternative strategies that can prove less attractive than envisaged.

Take structured credit, private debt and trend-following vehicles such as hedge funds. Investments like these can appear tantalisingly unusual, even glamorous, but this doesn’t make them essential shoo-ins for sensibly diversified portfolios.

For a start, such strategies might be beyond the comprehension of some investors. They may involve considerations around leverage, liquidity and other issues that require a heightened level of understanding.

In addition, these “sophisticated” investments might conspicuously fail to deliver during difficult periods. Many are touted for an ability to offer low volatility in times of market stress, yet history suggests such claims should be taken with a sizeable pinch of sea salt.

By way of illustration, think back to the underwhelming performance of music royalties and other novel alternatives amid the tumult of the COVID-19 pandemic. Their structure and management proved less than adequate in the face of challenging conditions¹.

The fact is that with some alternative investments, as with scuba diving, there’s a distinct possibility of finding yourself left in the dark and disappointed. This isn’t what multi-asset solutions should be about.

The value of choosing wisely

The landscape of multi-asset investing has undoubtedly been reshaped in recent years. Inflation, interest rates, trade tensions and other factors have underlined the need to view strategic and tactical asset allocations in a fresh light.

As a result, the classic 60/40 equity-bond portfolio has lost some of its lustre in the eyes of many investors. Its standing as an unerring engine of balanced growth and resilience is under pressure. Other would-be sources of returns and robustness are increasingly entering the reckoning.

Alternatives can undoubtedly play their part here. Our own multi-asset funds fully acknowledge as much. As with any assets, though, investors must fully appreciate what they own and why it merits a place in their portfolios.

I wasn’t really looking out for them during my trip, but I imagine there are plenty of visitors to the Great Barrier Reef who are happy to sit on a beach or stay in a boat. Maybe this is akin to a 60/40 approach – less risky yet potentially still fulfilling in its own way.

We can perhaps think of the snorkellers as multi-asset investors who explore alternatives for which there seems a pretty clear-cut case. Examples might include gold, whose stability has obvious allure at present, and infrastructure, whose long-term appeal has been bolstered by the all-pervading demands of the digital revolution.

And the scuba divers? Well, it’s vital to concede we might have had the time of our lives – this is always a possibility, just as it is in the investment world – but on this occasion, as it turned out, a simpler choice would probably have served us better.

It’s a lesson worth bearing in mind for investors seeking superior outcomes in a fast-changing and uncertain world. Maybe I should head back to Oz at the earliest opportunity, just to learn it again.

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[1] See, for example, Financial Times: “What’s happened to music royalty funds?”, September 27 2023 – https://www.ftadviser.com/investments/2023/09/26/what-s-happened-to-music-royalty-funds/

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