Morgan Stanley’s financial equity research anticipates AuM of multi-asset funds will grow to $6 trillion by 2018. Andrew Sheets and his team at Morgan Stanley said in their research report dated Aug. 5, 2014 that notes flows are shifting into strategies with the ability to move across asset classes.

Three pillars of cross-asset investing

According to the Morgan Stanley analysts, cross-asset investing can be analyzed in three ways: (a) identifying disconnects between markets can provide important signals, (b) flexibility is valuable in a world where opportunities have been uneven and (c) a broader approach should make it easier to address end-investors more focused on risk-adjusted outcomes.

The analysts point out that by weaving together all the above, the assets under management of multi-asset / cross-asset funds could expand to over $6 trillion by 2018. The following graph captures the strong growth anticipated in “multi-asset” investing:

Growth of multi-asset investing Cross-Asset

The MS analysts note that “cross-asset” investing captures an enormous range, from London hedge funds to Chicago insurers and from EM equities to Japanese rates.

Cross-asset correlation index

The research report explains that cross-asset investing describes investors with the flexibility to move where global markets offer the greatest opportunity. The report points out that the last seven years are rich with examples. It notes that 2008-09 witnessed credit spreads hitting levels last seen in the Great Depression and produced a 58% peak-to-trough decline in global equity markets less than five years after a 49% decline from 2000-03. Interestingly, assets and regions that were previously independent became highly and painfully correlated, further accentuating volatility. The following graph captures the Cross-Asset Correlation Index (CACI), which is based on average correlations within and across asset classes and regions for 20 major global assets:

MS Cross-Asset Correlation Index

The Morgan Stanley analysts note that during a 10-year period, fundamentals and mean-reversion have tended to dominate asset prices. They point out that by having a longer horizon, valuation and mean-reversion will become important.

Median reversion Cross-Asset

U.S. in early expansion stage

The MS analysts have derived the following cycle gauge based on employment, credit conditions, corporate aggressiveness and the yield curve. The analysts note that the cycle indicator currently suggests that the U.S. is still in the early stages of the “expansion” phase.

US cycle indicator Cross-Asset

The following table captures Morgan Stanley’s forecasts across assets:

Forecasts across assets Cross-Asset

The MS analysts conclude that the investing world is changing, rediscovering the value of asset allocation and refocusing money management on investor end-goals. However, the report also suggests that a broader reach would help to achieve this, but only with a framework to sift through the torrent of information that a broader view produces, aided by a strong team of regional and asset specialists to address a multitude of issues.