The benefits of using multi-asset trusts to manage volatility

With diversification, multi-asset trusts give investors an extra degree of security while assisting in navigating global uncertainty

For investors, the world has never been predictable, but in the last five years, it has gotten increasingly so. Part of the fault lies with digitization. In just a few seconds, news can spread across the globe. With sometimes disastrous results, the news can then be quickly altered and disseminated. Additionally, the economy is changing more quickly now thanks to digital technology. AI-powered startups are hitting previously unachievable revenue milestones.

Recently, Y Combinator, the startup accelerator best known for supporting Dropbox and Airbnb, revealed that its most recent group of tech start-ups was expanding at an unprecedented rate of ten percent per week. Just a few years ago, the majority of these businesses would have needed to employ sizable teams of costly human codes. Today, however, AI has written 95% of the code.

These digital shifts coincide with the global political order being upended by populist political parties. The global trade war led by Donald Trump has upended decades-old trading networks and jeopardized the dollar's reputation as a safe haven. The biggest nations in the world are also drowning in debt, which makes it extremely difficult for them to handle future crises.

Trusts with multiple assets provide additional security.

Given this, it makes sense to think about where multi-asset trusts fit into a portfolio. The CEO of J. is Maggie Fanari. A multi-asset approach gives us the ability to respond decisively to shifting macroeconomic conditions across a market cycle. Multi-asset trusts like RIT Capital Partners (LSE: RIT) "offer investors access to differentiated global strategies, hard-to-reach assets, and long-term structural themes, making them highly complementary to most portfolios," according to Rothschild Capital Management, the manager of RIT Capital Partners.

Additionally, through diversification, multi-asset trusts offer investors an extra degree of security. According to Alastair Laing, CEO of CG Asset Management and co-manager of Capital Gearing Trust (LSE: CGT), "diversification is famously the only free lunch in finance."

Investment trusts with closed-ended structures are ideal for diversification and holdings of multiple assets, some of which may be illiquid. Fanari claims that "we have a structural advantage due to our permanent capital base, which allows us to ride out short-term volatility, allocate meaningfully to less liquid opportunities, and maintain conviction in high-quality investments."

Obviously, investors could create their own multi-asset portfolio that included gold, bonds, stocks, and even exposure to illiquid assets like renewable energy and private equity through investment trusts. There are additional dangers associated with this, though. "If capital gains tax is crystallized every time rebalancing occurs, this could be tax-inefficient and requires a lot of work," says Laing.

Investors pay for the manager's expertise when they pay for a trust's portfolio management. Because the assets stay in the trust, there are additional tax advantages. Exposure to somewhat exclusive private-market themes is another benefit of a trust like RIT. Access to specialized managers is another advantage, according to Fanari. These specialized partners respect our patient capital over the long run. All of the major multi-asset trusts, including Caledonia Investments (LSE: CLDN), Personal Assets (LSE: PNL), Capital Gearing, and RIT, provide something a little different, with the latter being more concentrated on private equity. Additionally, a more defensive strategy has been favored by Capital Gearing and Personal Assets, which concentrate on gold, stocks, and bonds (mostly linked to inflation).

The opinions of the investment team have been "shaped by an expectation of regime change" in recent years, according to Sebastian Lyon and Charlotte Yonge, co-managers of Personal Assets. Beginning in the summer of 2020, a "world of greater uncertainty, higher inflation, and a bond bear market" has been brought about by inflation, government debt, shifting political sands, economic uncertainty, and technological advancement. The 2020s are already starting to look very different from the 2010s.

In place of riskier assets, the managers have switched the portfolio to "complementary asset classes that may offset falls in equity markets." Additionally, they have decreased their exposure to the US dollar "because investors are questioning the dollar's status as the world's reserve currency more and more." Personal Assets has been increasing its yen holdings instead. An essential component of the wealth-protection plan for personal assets and capital gearing is index-linked bonds. Laing states, "We believe that the function of inflation-linked bonds in a fiat monetary system is equivalent to that of gold under the gold standard, i.e., the asset class that is closest to risk-free."

According to Charlie Morris, the chairman and founder of ByteTree, investors ought to take things a step further. As gold becomes a reserve asset and a hedge, hold bitcoin for a profit. I think the best strategy for asset allocators is to combine the two assets in a risk-weighted manner. The reserve asset for the real world, in my opinion, is gold, and the reserve asset for the internet is bitcoin.

In recent years, holding a small amount of bitcoin in a portfolio has been a wise move. It demonstrates why it makes sense to take a variety of assets into account when building a portfolio. This decision-making process may be less taxing for multi-asset trusts. This strategy might not be acceptable to all investors, but it is something to think about. A multi-asset portfolio aims to improve long-term returns while lowering risk and volatility through diversification.

Laing claims that "poor investment decisions can result from the pain of losses outweighing the joy of profits." "Investors can safeguard their portfolio against their bad, emotionally motivated choices by making investments to prevent large drawdowns.