Changes in the regulatory regime, combined with an increasingly sophisticated marketplace, will enable multi-managers to offer investors true multi-asset-class retail investment products.The British retail investment market is on the cusp of experiencing a transformation. Regulatory changes under the guises of the new Financial Services Authority sourcebook (Coll) and non-Ucits retail schemes (Nurs) are set to give rise to a whole new type of investment fund – one that allows the fund manager access to a much broader range of investment tools. At the same time, the marketplace is offering an ever-increasing array of asset classes and investment products to the smaller investor. Both these events are going to create a more sophisticated and diverse marketplace. The good news is that these changes offer investors greater choice and flexibility. For multi-managers like myself, it opens the door to true multi-asset investing – a discipline that I expect to see gaining in importance over the coming years. Multi-asset investing offers the opportunity to perform in a variety of economic conditions. Gaining a better understanding of what an asset class actually is helps explain why multi-asset investing is such an important discipline to embrace, and why it has such an enormous impact on the overall risk-adjusted returns of a welldiversified investment portfolio. Diversification – the core principle of any investment portfolio – means so much more than just making multiple investments. An asset class can be defined as a group of investments that display similar characteristics. They tend to share similar risk and return profiles, and display similar price behaviour as their fortunes move in sync with each other through the cyclical swings of normal global economic activity. In fund management parlance, these investments are referred to as displaying positive correlation. For the portfolio manager, positive correlation is not a good thing. Risk is reduced, and diversification achieved, through investing in asset classes that display negative correlation. Different asset classes display varying levels of correlation. Bonds perform well in low-inflationary environments and economic downturns. Commodities perform in overheating economies and equities perform in growing economies. Put simply, asset classes perform differently in different market conditions. The traditional asset classes used by most investors have historically been cash, fixed income and domestic equities. Within the latter two asset classes, further diversification can be achieved through short-term, long-term, high-yield, convertible and corporate, in the case of bonds, and large-cap, mid-cap, small-cap, value and growth, in the case of equities. In both cases, an investor can diversify even further by investing in international markets. Historically, global stockmarkets tended to display lower levels of correlation to each other than they currently do, and it was enough to further diversify your portfolio through overseas equities and debt instruments. But in the wake of increasing globalisation, we are seeing much greater levels of correlation between global markets. Global equities on a regional basis are starting to move as one. Companies and industries are more globally orientated now and there is a strong case to support the argument that diversification can be better achieved through industry sector rather than global region. For portfolio managers, negatively correlated assets have to be found elsewhere to ensure a well-diversified portfolio. Equities, bonds and cash are simply not enough any more. There have always been plenty of other, less-correlated asset classes to look at, but they have only really become accessible to smaller sums of capital in recent years. New products, such as exchange-traded funds, covered warrants, Reits, commodity funds and funds of hedge funds, have all added to the toolbox. Now investors of all sizes can use these retail products to access a broader range of assets embracing property, venture capital, structured products, hedge funds, commodities such as gold and oil, and derivative instruments, the latter of which can now be used within investment funds for speculative purposes rather than simply efficient portfolio management. The regulatory changes in effect through Coll and Nurs have allowed those fund of funds providers who convert to these rulebooks the ability to embrace the majority of these additional asset classes. Multi-managers will then be able to offer truly multi-asset portfolios. However, multiple-asset-class strategies should be more than just passive exposure to the broad range of asset classes now available. Simply throwing a bit of hedge fund, property and commodities into the mix is not going to be enough in this more sophisticated and demanding marketplace. I would expect dynamic asset allocation across these multiple asset classes to be the main driver of portfolio outperformance over the coming years. Successful asset allocation involves finding the optimum combination and exposure of complementary investments. This necessarily involves a high element of research, analysis and risk control. And it hardly needs pointing out that the greater the range of asset classes, the greater the levels of knowledge, research and analysis that are required. For those looking to manage portfolios themselves, this will necessitate a greater resource than is probably used at the moment. For the casual investor, there are a limited number of multi-asset fund of funds portfolios available. However, I am sure this is set to grow over the coming months and years. The introduction of multi-asset strategies will broaden what is achievable in terms of performance and investment objectives. The opportunity for downside protection and performance in a wider variety of market conditions is only the tip of the iceberg in terms of what is possible. But even the most dynamic of asset allocation implementation policies will not capture 100% of the upside of any particular asset class, theme or market. Despite the ever-evolving world of portfolio management, the principles are still the same. The right blend of non-correlated or low-correlated assets ensures a smoother ride over the long term.