Multi-asset funds have become increasingly popular as a one-stop solution for investors seeking diversification via a single fund. These funds typically comprise equities, fixed interest and cash and some will also provide exposure to property and other alternatives. Ultimately, they rely on a professional manager to use their expertise to find the right balance of diversification in the fund. This article looks at why financial advisers are using multi-asset solutions, and outlines some issues to consider when choosing a multi-asset fund.
Financial advisers have traditionally created portfolios for clients by blending together a selection of single-strategy funds, but this creates a number of issues. The due diligence required can be a burdensome task, given the number of funds and sectors available, and portfolio construction requires skilful asset allocation and fund selection to ensure adequate diversification. A comprehensive review process is also required in order to monitor the portfolios on an ongoing basis. Given these issues, advisers are increasingly acknowledging the advantages of outsourcing this specialist discipline, and one solution is multi-asset funds. Multi-asset funds can also be more cost effective and can free up time to spend on tasks that provide added value for clients.
According to data from the Investment Association (IA) in July 2018, the total assets under management in mixed-asset funds was £145bn. This incorporates the following IA sectors – Mixed Investment 0-35% Shares, 0-60% Shares and 40-85% Shares, UK Equity and Bond Income and the Flexible Investment sector. When we include the IA Volatility Managed sector (£27.6bn), we can estimate that multi-asset funds account for circa £173bn or nearly 15% of the total UK fund universe. There are nearly 700 funds listed in the sectors above which is approximately 20% of the overall universe. So how does an adviser choose the most suitable?
Multi-asset funds come in various forms and the chart below offers a framework to help advisers identify the key characteristics and differences between these funds:
In selecting multi-asset solutions, an adviser must first consider the risk appetite and return objectives of the client – whether a fund is 'risk targeted' or 'return focused' could be the starting point.
- Investment Objectives – Multi-asset funds tend to be either 'risk targeted' or 'return focused'. Risk targeted funds typically comprise a range, whereby each fund will have targeted volatility boundaries. These funds normally sit in the IA Volatility managed sector. Return focused funds aim to outperform a specified benchmark (e.g. CPI +3%) with risk being a secondary consideration. Income focused multi-asset funds are another type of fund with specified income objectives.
- Investment Style – The investment style can either be active, passive or a blend of both. This style bias determines the cost of the funds with an active approach being higher cost than a blend or passive approach. Passive funds tend to follow long-term strategic asset allocations closely as opposed to active managers who will implement short-term tactical tilts.
- Investment Method – Funds can either take a 'single manager' approach whereby one fund manager will manage all the investments in the fund or a 'multi-manager' approach where the fund will invest in different fund managers across asset classes. Multi-manager funds can be implemented through separate mandates with sub-fund managers, or through a 'fund of funds' structure. Fund of funds may be either fettered, whereby the manager will only use internal funds or unfettered, whereby they will invest in external funds.
- Underlying Exposure – Some funds may use actives only or passives only or a blend of both. Others may focus on direct holdings in equities or fixed income securities for example, or combine direct holdings into their 'fund of fund' structures. There are also asset class variations in that some funds will have a traditional split between equities and fixed interest only while other funds will include alternative asset classes such as property, commodities, infrastructure or derivative based strategies.
In selecting multi-asset solutions, an adviser must first consider the risk appetite and return objectives of the client – whether a fund is 'risk targeted' or 'return focused' could be the starting point. The funds available cover a wide range of risk profiles and this too can be used to help narrow the universe. Many are mapped to a risk profiling provider which can be useful when comparing funds. Cost is important and varies widely, driven mainly by the underlying holdings in the fund. A cost-conscious investor may be more suited to a passive or blended approach which includes direct exposure or even a fettered fund of funds. A more sophisticated client may be willing to accept higher charges for this style of investing. It can be appropriate to blend a number multi-asset solutions in a client portfolio to optimise the benefits from a range of investment styles. Selecting suitable multi-asset funds and managers still requires a high level of due diligence, but there are inherent advantages to this approach which may be more suitable for certain advisory businesses depending on their underlying clients.