Multi-asset funds promise investors good diversification. They can include equities, bonds, property, cash, commodities such as oil, gold, inflation-linked government bonds and even derivatives. By spreading investments across these asset classes, these funds can provide good protection if markets are volatile – that is the theory at least.
Consider the fact that a Japan, UK or US equity fund is purely invested in shares listed in those countries. A UK corporate bond fund is also restricted where it can invest. The same applies to a sector-specific vehicle, for instance, a biotech, natural resources or property fund.
A multi-asset fund by contrast has less constraint on where it can invest – either geographically or on a sector basis. It can increase or reduce exposure to an asset class as it sees fit. This might mean tactically moving out of an over-heated property sector or increasing exposure to equities if valuations become attractive.
It is not surprising that the flexibility of multi-asset funds has proved highly attractive to investors. Investors want to invest in a range of assets which will each reward them in the long-term but where they do not all fall in value at the same time. (It is rare that bonds, equities, property etc. all move in the same direction simultaneously).
However, ‘multi-asset’ is a very broad definition and funds that are labelled such can often be markedly different with regards to their investment parameters.
For instance, one multi-asset fund might simply split their portfolio between global equities and global bonds. Conversely, another might hold equities, bonds, commodities, property, currency and derivatives (allowing a fund manager to hedge and potentially make money if they correctly anticipate a price movement either up or down).
One multi-asset fund might be designed to produce income, another to produce capital growth. A portfolio might be made up of individual shares, bonds, commodities, property or it might be composed of selection of collective funds from a host of providers – specifically selected by one overseeing manager (the fund of funds or multi-manager model).
Comparing like with like
To help investors make more meaningful product comparisons in this crowded fund universe, the Investment Association (IA) has split multi-asset funds into different categories:
- Mixed Investment 0-35% shares
- Mixed Investment 20-60% shares
- Mixed Investment 40-85% shares
- Flexible Investment (no minimum or maximum requirement for investment in shares)
- Other mixed-asset funds exist in the Volatility Managed Sector [pdf] and the Targeted Absolute Return sector. Asset allocation in these funds is entirely at the discretion of the manager.
For example, Mixed Investment (0-35% shares) limits exposure to the stock market to 35%; whereas Mixed Investment (40-85% shares) allows higher exposure to equities if the fund manager so chooses. Flexible Investment funds have no restraints so in theory a fund in this sector could be 100% in equities. There is no minimum fixed income or cash requirement and no minimum currency requirement. The fund manager has the freedom to invest without any constraints.
Given the variation in multi-asset funds on the marketin 2019, it is fair to say that there should be something to satisfy investors with totally different tolerance to risk.
But the breadth of choice itself can be a problem. As Patrick Connolly at financial advisers Chase de Vere explained, it is often very difficult to compare different multi-asset funds, even if they are in the same IA grouping. This is because the IA categories still have broad parameters and one fund in the group may look entirely different and have an entirely different risk profile than another.
Consider the Mixed Investment 40-85% shares category. There is a huge discrepancy in terms of risk profile between a relatively cautious fund with 40% in equities and an aggressive fund with an 85% weighting – yet they sit side by side in the same sector.
There are 357 multi-asset funds, sitting in three different mixed investment sectors depending on the proportion of equities they hold, and they can vary hugely in terms of where they invest, the approach they adopt and the risks they take And as Connolly pointed out this does not even include the Flexible, Targeted Absolute Return and Volatility Managed sectors, which contain hundreds more multi-asset funds with different objectives and make up.
“If it is not confusing enough having multi-asset funds sitting in different sectors and doing lots of different things, it becomes even more complicated when you consider that there is not a universal definition of what constitutes multi-asset.”
Martin Bamford, chartered financial planner with Surrey-based Informed Choice, agreed like-for-like comparisons between funds in the various IA mixed-asset class sectors remains challenging.
“The labels applied to funds and sectors, especially ‘absolute return’, can be confusing for investors. It is important to look under the hood, to understand both the objectives and components of a fund. This is a much better approach than relying on the presence of a fund within a particular sector, assuming it will be broadly similar to other funds in that sector.”
Choosing the right fund for you
When comparing funds, it is imperative to understand the differences in funds’ underlying asset allocation, how they are managed and the level of risk which the managers take.
It is essential to ensure that the objectives and risk profile of a fund match those of the investor. For instance, it would be a mistake for a very cautious investor to select a multi-asset fund where the manager regularly holds 80% in shares.
Similarly, a more aggressive investor will not be suited to a fund which is typically focused on government and short-dated investment grade bonds.
Fund costs are another consideration for investors. “Investors need to be wary of charges,” Connolly warned. “Many multi-asset funds are multi-manager funds and the investor ends paying an extra layer of charges because they pay not only for their own manager, but also for the managers of the underlying funds in the portfolio.”
In this situation, some multi-managers charge 0.75%, 1% or even more each year for their services and, with underlying fund charges included, this could mean that total charges on the fund are more than 2% per annum. These high levels of charges can eat significantly into investors’ returns. Performance figures and the manager’s history in managing a multi-asset fund is another important factor in an investor’s fund selection.
Neil Mumford, a chartered financial planner at Milestone Wealth Management favours multi-asset funds that have a track record rather than new entrants backed by expensive marketing campaigns but little else. In recent years, investment houses have not been slow to launch funds into a sector attracting a great deal of media coverage.
But as Mumford explained: “You need to be careful when so many funds are introduced that you identify an investment company that has been managing funds in this area for some time. For instance, Trojan’s multi-asset fund, designed to manage the downside risk, whilst achieving some capital appreciation.”
He also warned against some of the more convoluted fund targets.
“There are a number of funds who have unrealistic targets, normally linked to the CPI plus a percentage – many have been unable to achieve those returns.”
Identifying unnecessarily convoluted fund targets is one thing but what defines a good multi-asset investment team and process?
Jochem Tielkemeijer, investment consultant at Natixis Investment Managers believes there are three main ingredients. “A solid investment philosophy based on sound economics; a consistent investment process, and thirdly, good investment team of professionals. People are arguably the most important factor for success,” he said.
“If you do not have the required capacity in your team in terms of professional breadth and depth – people from different backgrounds in the industry, with experience across a broad range of the asset universe and portfolio management capabilities – the quality of your investment process and philosophy will likely be poor.”
He added that investment managers need a process that is repeatable over time, easy to implement and, most importantly, is not subject to emotional reactions to
The DIY option
Indeed, emotional reactions to market peaks or troughs and less diligent research are factors that often hinder individual investors who opt to construct their own multi-asset portfolio rather than entrust it to a professional fund manager.
It is not impossible to enjoy success if you take the DIY approach, but it is time consuming and there is a risk of following the herd instinct or failing to keep an adequate check on underlying risk.
As Connolly pointed out, a collective fund can provide investors with an all-in-one diversified portfolio, which is managed by an investment expert (or team) who is responsible for monitoring the underlying assets and making changes if they believe this will improve performance or manage risks better.
“The ease of administration of having a whole portfolio in one fund is beneficial for those who want a ‘buy and hold’ solution and do not want to be continually reviewing and changing their underlying fund holdings.”
He added: “They are very useful for those with smaller amounts to invest as they can achieve a high level of diversification, to spread risks, through just one fund.”
This off-the-peg solution might not suit everyone though. Some investors may prefer a more tailored approach – either mixing funds themselves or through their IFA. As Bamford explained: “We very rarely use multi-asset funds at Informed Choice, instead creating and maintaining portfolios based around single-asset class funds.
“This approach gives us more control over the risk level of the portfolio, as we can fine tune the underlying asset allocation. It also means we can select the most suitable fund manager for each asset class.”
However not every IFA has the time or resources to operate in this way. Many prefer to outsource as Laith Khalaf, senior analyst at Hargreaves Lansdown explained.
“I do not think it is a case of abdicating responsibility on the part of the IFA – it is more the case that it is putting a lot on their plate if they are responsible for making all investment decisions on top of pension, tax, inheritance planning etc.
Outsourcing to a specialist in many instances makes sense and it is one of the main reasons multi-asset funds have grown in popularity.”
Best of breed
One way of achieving diversification via a multi-asset investment strategy is to opt for a fund of funds. This multi-manager approach allows you to access leading fund managers in their respective sectors and brings all this expertise together in one fund. For instance, the Premier Multi-Asset Absolute Return fund currently includes (amongst others) the Artemis US Absolute Return fund; F&C Real Estate Equity Long/Short fund; Polar Global Convertibles fund and the M&G Credit Income fund.
Similarly, the HL Equity & Bond fund is ‘unfettered’ in that it can select from a broad number of investment fund providers. Some multi-asset fund of funds, such as those offered by Vanguard are purely made up of in-house funds – in this instance trackers.
As Khalaf pointed out, both types of fund have their inherent appeal though he does stress that in general multi-manager charges are a consideration.
“With a multi-manager fund you are getting a portfolio of funds with an associated charge and then a charge from an overall multi-manager.”
But as with all fund selection, higher charges are not the overriding issue if long-term performance is superior. And as Khalaf explained, multi-manager funds frequently allow access to institutional funds and highly-regarded retail funds that have ‘so-closed’ (temporarily closed for new investments).
Once again, the onus is on looking at the long-term performance and evaluating whether the charges are justified.
Delivering the goods
Whether the preference is for a stand-alone multi-asset fund or a fund of funds option, selection should inevitably focus on aligning investor risk with fund risk – but just as importantly, scrutiny of the fund managers credentials.
Whether looking at an equity or bond manager, Khalaf said: “It helps to identify a manager who has been around the block a few times. You want to see managers that have managed money in all market conditions.”
Within the HL Equity and Bond fund, he name-checked the Artemis Income fund run by Adrian Frost who has a track record going back over 20 years.
“Over this period, he has delivered through shrewd stock selection and consistently identifying cash-generative companies.”
Siddarth Chand Lall, manager of the Marlborough Multi-Cap Income fund is also picked out.
“This is an unusual equity income fund as it is largely in the mid and small cap space. It has proved a highly successful
hunting ground for the manager over many years,” Khalaf said. Connolly at Chase de Vere favours two very different funds in the multi-asset universe – the Investec Cautious Managed Fund and the Vanguard LifeStrategy 60% Equity fund.
“The Investec Cautious Managed benefits from an experienced manager [Alastair Mundy] who typically invests 50% in assets such as shares which he expects to grow and 50% in assets in order to provide protection.
“These protection assets will include government bonds and cash, but the fund also holds gold and silver, in case shares and fixed interest both crash. He adopts a contrarian approach, by making long-term investments in cheap, out-of-favour companies.”
Mundy himself explained in greater detail his investment style.
“We believe that the most predictable behavioural response of investors is their overreaction to news, be it positive or negative. This encourages us to seek investment opportunities where companies are suffering from poor sentiment and their valuation is at a discount to our assessment of medium-term fair value.”
Connolly’s other fund pick, Vanguard LifeStrategy 60% Equity, invests in a range of Vanguard’s equity and fixed interest tracker funds.
“It has very low charges, with an ongoing charges figure of just 0.22%. As the name suggests, the fund is invested 60% in equities and its exposure is heavily focused on US and international markets. There are other versions available with different equity weightings so investors can choose the option that suits them best,” he said.
James Norton, senior investment planner at Vanguard insists simplicity and transparency are central to a sound multi-asset offering.
“Investors want simplicity in the products they choose. With our LifestyleStrategy fund range we offer investors funds with 20%; 40%, 80% or 100% equity. And we rebalance the fund as cash flows in. We keep the risk at the level that the investor bought into. I think that is important”.
He added: “So if it is our 60% equity fund, we will not look to reduce share exposure simply because stock markets take a hit. We do not sell equities on the way down – we see an opportunity to buy cheaper.”
The future of multi-asset funds
While they may not be the ultimate ‘funds for all seasons’ that they have been hailed (are there such funds?), the diversification and flexibility these products oer is to be welcomed.
Of course, not all funds are as flexible or diversified as others and even funds that do allow greater scope in terms of asset classes, still depend on managers timing their calls right.
It is true that the ‘multi-asset’ fund universe has become increasingly crowded in recent years. Time will tell whether some players exit the market as performance fails to live up to hype. But those providers that can demonstrate value for money, that are clear about a funds objective and which have built up a strong track record over a meaningful timescale, will continue to attract money.