Lifting the lid on Multi Asset Funds
An overview of the Multi Asset sector
By Liz Rees, Head of Research
The term ‘Multi Asset’ embraces a spectrum of funds that employ a wide range of strategies. In this article we describe some of the variants which fall under the banner, explain how they differ and suggest what factors to consider when choosing a fund to meet your needs.
Multi Asset options can be found in one of five separate IA sectors*(see appendix for a fuller definition). These are: Mixed Investment 0-20% shares, Mixed Investment 20-60% shares, Mixed Investment 40-85% shares, Absolute Return or Flexible Investments.
Be aware that these sub-sectors will include funds restricted to Bonds and/or Equities (shares) as well as those incorporating additional asset classes such as Property, Private Equity, Infrastructure and Alternatives. Consequently, the risk profiles of the funds can vary considerably. Furthermore, a few Multi Asset Funds have been classified into the IA Specialist Sector, for example Baillie Gifford Diversified Growth, and these tend to involve significant hedging or exposure to Alternatives but without ‘Absolute Return’ mandates.
For many years diversification strategies, typically represented by a ‘Balanced Fund’, adopted an approximate 60:40 split between Equities and Bonds with the exact weightings adjusted to reflect prevailing market conditions.
‘strong growth in assets under management since the financial crisis as investors have become more aware of the benefits of a well diversified portfolio’
Today, the approach has been questioned as these asset classes have become increasingly correlated prompting product providers to explore a wider universe of investments. To capitalise on the opportunities specialist teams have been assembled which make use of both internal and external resources.
The sector has experienced strong growth in assets under management since the financial crisis as investors have become more aware of the benefits of a well diversified portfolio. The Investment Association (IA) reported that the Mixed Asset class has seen much stronger inflows than other asset classes, attracting £480m in October alone. The Absolute Return sector has repeatedly headed the best seller tables and includes several funds with a Multi Asset mandate; we will look at the techniques they use to generate returns in a future review.
Characteristics of a Multi Asset Fund
Multi Asset investing applies selected investment strategies using both active and passive styles across multiple asset classes and geographies. Some funds invest directly into assets while others use funds or ETFs to obtain their exposure. There is likely to be a lead manager supported by a team of specialists in different areas who generate ideas in which they must demonstrate conviction to warrant inclusion in the portfolio.
Close attention is often paid to asset allocation as a primary driver of performance and, subject to the exact remit of the fund, the managers can in theory adopt a flexible, ‘go anywhere’ policy. Opportunities may be identified in fields as diverse as: Infrastructure, Renewable Energy, Private Equity, Timber & Forestry and Aviation Finance. Sophisticated techniques might also be employed, for example in currency hedging, convertibles, derivatives, distressed debt and pairs trading.
Greater diversification should offer the potential to enhance returns when mainstream assets are under-performing so in an economic downturn managers may increase exposure to assets with a better record of protecting capital, such as gold. By selecting investments on the basis of the outlook for markets and the prospects for individual asset classes, Multi Asset portfolios aim to deliver smoother returns (i.e. less volatility) than single asset funds. A true Multi Asset Fund (there are actually limited numbers of these) will be completely unconstrained and not obliged to hold any asset class or benchmark they have a negative view on.
Whether the funds use active or passive investments or a blend of both will affect the charges incurred. Obviously a passive option will incur the lowest cost but there will not be the prospect of generating out-performance through stock selection.
Variations of Multi Asset Funds
A number of funds include the generic term ‘Multi-Asset’ in their title while some give an indication of their style, for example Cautious, Balanced, Diversified or Aggressive. Others have a title common to a range from the provider such as the Old Mutual Foundation Funds. Furthermore, there are many funds which employ variations of the Multi Asset approach, including Multi-Manager, Absolute Return and Multi-Strategy and this may be referenced in their name.
Multi-Manager Funds (sometimes abbreviated to MM) are diversified portfolios of ‘best in class’ funds which focus on fund selection to a greater extent than asset allocation. They generally seek to identify the best active funds in an area (although some use passives or a combination) and often have access to specialist funds that are not available to all investors.
‘diversified portfolios of ‘best in class’ funds which focus on fund selection to a greater extent than asset allocation’
Funds in a MM portfolio are chosen to complement each other in terms of investment style and process so if one is out of favour for a period of time another should compensate thus smoothing returns. Some MM Funds have a global income or growth mandate while others may concentrate on a particular geographic region. Jupiter is a market leader in this area with their Jupiter Merlin MM selection which is AAA rated by Square Mile, our independent research partners.
In general Multi Managers do not have such a broad a mandate as a true Multi Asset Fund and the extra research input if they are selecting active funds can mean they are more expensive. However, a number of Providers mitigate this by using in-house funds partially or exclusively.
Absolute Return Funds may adopt a Multi Asset strategy to achieve their goal of delivering capital preservation and steady growth over the medium term. Another title for such funds is ‘market neutral’ as they are less affected by what happens in the economy or stock market.
Although such funds aim to grow your money in all market environments with low volatility but this is not guaranteed. In reality they tend to reduce the downside risk in challenging markets but are less likely to perform strongly when stock markets are buoyant. A notable feature of Absolute Return Funds is the ability to take both short and long positions on markets and it should be remembered that not all use a Multi Asset approach.
Multi Strategy Funds also target positive returns over the economic cycle and their mandate is to produce equity like performance with less than half the volatility. This is the broadest type of absolute return strategy and may use more complex strategies than a regular Multi Asset portfolio.
Multi Strategy Funds specifically look to identify themes and devise the most appropriate tactics to benefit from them while also focusing on risk management. For example, the Aviva Investors Multi Strategy (AIMS) divides investment ideas into 3 groups: market, opportunistic and risk reducing strategies. One of the oldest and best known is the Standard Life Global Absolute Return Strategies Fund (commonly known as GARS). However, some of its former managers, albeit only a part of an extensive team, left to set up a similar fund at Invesco Perpetual – the Global Targeted Returns Fund.
Understanding the risks of Multi Asset products
The Multi Asset sector is not homogeneous and funds under its umbrella will carry varying levels of risk. Therefore, investors should consider their own attitude to and capacity for risk and target realistic returns when choosing a fund, taking into account personal circumstances and investment goals.
‘investors should consider their own attitude to and capacity for risk and target realistic returns when choosing a fund’
Multi Asset Funds are generally either risk or returns orientated; a few include both goals in their mandate. For those providers which have a range of risk labelled options, such as Legal & General’s Multi Index 3-7 series, the lower risk options will have greater exposure to cash and bonds in order to try and limit volatility. Conversely, the more adventurous funds will have the highest weightings in Equities. Other providers label their funds by the equity proportions, such as the Blackrock NURS II Consensus range, and these will be rebalanced as and when required.
Multi Strategy, Absolute Return and some Diversified Funds may set a target return although this is not guaranteed. These funds will tend to be at the lower end of the risk spectrum because they often have capital preservation as one of their goals. A typical target return is base rate, cash or inflation plus 4% over a rolling 3 year period with half the volatility of global equities. The success of capital preservation varies considerably between funds so it is important to check that the fund is not delivering a high income at the expense of capital preservation or that growth orientated funds are achieving this with appropriate risk.
Multi Managers do not usually have a risk target as such although some may label their offerings as ‘cautious, balanced, growth or adventurous’ to help investors to pick the one which describes their attitude to risk. Other Multi Managers use ‘income’ or ‘growth’ to reflect their underlying objectives.
What are the main advantages of a Multi Asset approach?
The key advantages are diversification, flexibility, range of resources available and the blend of investment styles. Spreading risk across a range of asset classes can be particularly useful when faced with difficult and uncertain market conditions. It also captures alternatives to increasingly correlated Equity and Bond markets.
A lot of Multi Asset Funds will take all the asset allocation decisions on your behalf. It is a widely quoted assertion that 80% of performance is derived from asset allocation decisions and 20% from stock selection. Therefore some investors may be reluctant to pay the higher charges for active management when funds which use passives as their underlying investments can provide a broad exposure at low cost.
‘the key advantages are diversification, flexibility, range of resources available and the blend of investment styles’
Another attraction is the smoothing effect which means that the maximum drawdown is a lot lower as is the annual volatility. Drawdown refers to the falls experienced between peaks and troughs in the market over time. Holding a combination of ‘risk’ assets (such as equities and property), defensive assets (government and investment grade bonds, and cash) and alternatives can help smooth returns over time.
So Multi Asset Funds can be a good entry point to investing for less experienced investors providing a one stop solution at reasonable cost. This is not to say you shouldn’t carry out some research to ensure a fund is right for your own goals and risk profile.
The market is still developing and many providers have launched their strategies in the last few years so the limited track record can make it hard to assess how they are delivering on performance and risk. As they often do not measure themselves against a benchmark or a peer group, but instead often set a target return such as ‘inflation + 3%’ on a rolling 3 year basis it can be hard to work out which are delivering the best performance among their peers.
Fully active strategies can be expensive because of the resources required to run them; for example, if parts of the funds are ‘outsourced’ to specialist active fund managers or there is extensive use of derivatives.
Moreover, the hundreds of funds available across various IA sectors can make it difficult to identify a suitable investment. The complexity of some of the strategies used may also be a deterrent to investors who like to understand how their fund aims to deliver returns.
Finally, some of the older funds in the sector have attracted significant inflows and are now so big that liquidity could become an issue. For example, Standard Life GARS has £26bn in assets under management.
Pension freedoms and Multi Asset Funds
Pension Freedoms has created greater demand for Multi Asset solutions both in the accumulation (growing capital) and decumulation (drawing income) phases. Many recent launches have been tailored for the pensions market and have proved popular with the growing numbers of SIPP investors.
For investors entering draw-down capital protection is important because a sharp fall in the value of a portfolio early in retirement is especially hard to recover from when there is the need to draw an income. A smoother return can also help to generate a more reliable income throughout your retirement.
Some of the new products are designed to produce both income in draw-down and also offer the flexibility for the pot to grow through retirement to take account of increasing longevity. Of course this is likely to involve taking on more risk.
Summary and conclusions
Multi Asset Funds are gaining popularity with investors who value the diversification provided or simple want a ‘hands off’ approach. Certainly, many take all the asset allocation decisions on behalf of their investors yet choosing one may not be as straightforward as it seems at first glance. We need to remember that our goals, timescale and risk profile will change over the course of our lives so the level of risk that is acceptable when you are aged 30 is unlikely to remain appropriate over the course of your life.
Furthermore, we have seen that some funds may demonstrate significant underlying complexity and therefore it is particularly important to read the KIID (Key Investor Information Document) which will contain an indication of the level of risk and the fund reports to ensure you are comfortable with the investment style. Why not log on to our on-line tool : explore where you can also view the FE risk score and use our filters to narrow down your fund choices.
*IA (Investment Association) sector definitions
Mixed investment 0-35% Shares: Funds in this sector are required to have a range of different investments. Up to 35% of the fund can be invested in company Shares (equities). At least 45% of the fund must be in fixed income investments (for example, Corporate and Government Bonds) and/or ‘Cash’ investments. ‘Cash’ can include investments such as current account cash, short-term fixed income investments and certificates of deposit.
Mixed investment 20-60% shares: Funds in this sector are required to have a range of different investments. The fund must have between 20% and 60% invested in company Shares (equities). At least 30% of the fund must be in fixed income investments (for example, corporate and government bonds) and/or ‘Cash’ investments. ‘Cash’ can include investments such as current account cash, short-term fixed income investments and certificates of deposit.
Mixed investment 40-85% shares: Funds in this sector are required to have a range of different investments. However, there is scope for funds to have a high proportion in company Shares (equities). The fund must have between 40% and 85% invested in company shares.
Flexible investment: The funds in this sector are expected to have a range of different investments. However, the fund manager has significant flexibility over what to invest in. There is no minimum or maximum requirement for investment in company Shares (equities) and there is scope for funds to have a high proportion of Shares.
Targeted absolute return: Funds managed with the aim of delivering positive returns in any market conditions, but returns are not guaranteed. Funds in this sector may aim to achieve a return that is more demanding than a “greater than zero after fees objective.” Funds in this sector must clearly state the time-frame over which they aim to meet their stated objective to allow the Investment Association and investors to make a distinction between funds on this basis. The time-frame must not be longer than three years.
Specialist: Funds that have an investment universe that is not accommodated by the mainstream sectors. Performance ranking of funds within the sector as a whole is inappropriate, given the diverse nature of its constituents.
Important Information: We do not give investment advice so you will need to decide if an investment is suitable for you. If you are unsure whether to invest, you should contact a financial adviser.
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