A guide to multi-asset funds

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Written by: Tahmina Mannan, industry and content editor, FE Trustnet
28/08/2015
Multi-asset funds have been very much in favour in recent years, with the Investment Association reporting some £1.1bn in net retail sales year-to-date in the mixed asset sectors.

Many investors are drawn to these multi-asset fund because they remove a lot of the work involved in building a portfolio by investing in different asset classes on investors’ behalf.

Multi-asset funds allow investors to spread their risk and make the most of a range of investment opportunities across various markets by mixing different investment styles and strategies.

As an increasing number of investors have turned to the multi-asset sector over the past few years, fund providers are responding with a broad range of multi-asset products giving investors more choice than ever.

Changes to pension rules have also had an impact on inflows since April. The changes, allowing people greater freedom regarding how they use their money to fund retirement, has resulted in increasing numbers opting to stay invested in the markets.

Some multi-asset funds may be well-suited to the needs of these lower-risk investors, who often want to secure a combination of both income and capital growth.

Picking the right fund is not easy, however, especially in light of all the new products hitting the market. As it stands, the Investment Association (IA) says there are 446 funds across the mixed asset sectors.

Benefits

While it is understandable many investors, and industry professionals alike, tend to concentrate on particular shares, bonds or property markets, research quite often shows overall asset allocation is the key to long-term investment success.

Which means instead of trying to pick the next big thing (which often leads to investment heartache) investors are better off getting the right blend of asset classes.

According to a study in 2012 by Vanguard, asset allocation, rather than your ability to pick winning stocks, is responsible for 88 per cent of a portfolio’s returns over time.

Getting your asset allocation right is also a way to make sure you diversify risk. For example – shares and property tend to perform better if the economic environment is positive, while bonds and cash have historically been safer bets in more troubled times.

Of course, how you choose to allocate will largely depend on your risk-tolerance and the timeframe you are working with. Those who have time on their hands can afford to invest for a longer period, which means they can ride out any short-term shocks and market dips.

Those with a short timeframe, say those nearing retirement or already retired, will want to protect their capital and have a lower tolerance for risk.

Using multi-asset funds

A multi-asset fund manager can quickly move money around between the different asset classes to fully take advantage of new trends and market changes, and tweak their overall asset allocation depending on what the economic outlook is.

This means that if the manager thinks there’s a chance shares are about to fall they can try and protect your money by buying bonds instead, for example.

Multi-asset managers, at least in theory, have the ability to compensate for poor returns in one asset class by exposing the fund to another, better performing asset class.

While this often eases out setbacks from one asset class or another on the entire portfolio, there are, as with anything else, dangers in this approach.

Leaving all the investment decisions to a single fund manager or a single team could mean your returns could take a hit if they make the wrong call. You run the risk of being left exposed to huge losses if one asset class performs poorly, or miss out on potential profits when another does particularly well.

Investors should note multi-asset funds do not have their own sector, and categorising them is not an exact science. Many are assigned a benchmark to the index best matched to the fund’s holdings, but as this depends largely on what the fund has in its holdings  comparing one multi-asset fund to another is difficult.

Like other funds, multi-asset funds tend to fall into two key categories established by the IA: Income and Growth. The funds are then categorised by their maximum exposure to shares or bonds.

The IA has four key mixed asset sectors: Mixed Investment 0-35 per cent Shares; Mixed Investment 20-60 per cent Shares; Mixed Investment 40-85 per cent shares and the Flexible Investment sector. In general, the higher the proportion of shares, the riskier the fund tends to be.

One of the most popular multi-asset investments are “risk-rated” funds. Rather than focusing on a particular asset allocation, these multi-asset funds explicitly target a level of risk to match your appetite, sometimes carrying risk ratings, say from 1 to 7.

In theory, they allow you to determine the risks you want to take and then assign a risk profile accordingly. Each fund may indicate the level of volatility they are targeting and the amount of risk you are taking.

Investors interested in multi-asset funds should look to speak to an independent financial adviser to determine which fund would best suit the investor’s needs.

Multi-manager funds

Multi-manager funds are different from multi-asset funds as they invest in a broad range of funds from other fund management groups, and therefore delegate stock selection to specialists in each field.

One of the benefits of using a multi-manager fund is investors stand to profit from the investment styles and specialist knowledge of a greater range of experts, and can also gain access to managers and funds only open to institutional investors.

Multi-manager funds aim to avoid single-manager risk by investing in a range of managers, using different investment strategies to mitigate risk. The greater diversification of a multi-manager fund tends to attract investors during periods of market uncertainty.

Investors should note cost may be an issue. Investing in a multi-manager fund often leads to being exposed to two layers of management charges: the multi-asset funds’ charge and then the overall charge of the multi-manager fund.

So while multi-asset describes the type of assets the fund invests in, multi-manager tells us by whom the fund itself is actually constructed.

You can have a multi-asset portfolio which is multi-manager or not. Multi-manager funds will usually be multi-asset funds as they are trying to build a broad investment portfolio.

Whatever fund you do pick, make sure there is enough research going into the process. Better still, using the services of an independent financial adviser will help make sure you do not overlook any important points.

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