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Investment uncovered: How to pick a multi-asset fund

Three fund selectors explain what makes a choice investment for those seeking diversification

There has been a huge uptick in the number of multi-asset funds within the past five years. Growing in popularity still, they allow investors an easy-access and ready-made portfolio with multiple different asset classes.

By investing in a broad spectrum of asset classes, multi-asset funds can increase portfolio diversification while at the same time providing decent returns. Some advisers may even consider choosing them as a cheaper way of outsourcing portfolio management.

Three experts talk to Money Marketing about how they choose funds, diversification and the type of investors they are best suited to.

What criteria do you use when selecting multi-asset funds?

AJ Bell head of active portfolios Ryan Hughes: The key is ensuring that the investment team have the capability and experience to look across asset classes with suitable expertise.

We want to see real experience of investing successfully in different market conditions as the whole premise of looking at a multi-asset fund is hopefully to have a smoother investment journey.

Hector Kilpatrick Cornelian Asset Managers chief investment officer Hector Kilpatrick: We analyse achieved performance during different periods of the investment cycle to determine whether the fund manager has demonstrated an ability to outperform in different market environments and whether process, philosophy and risk management processes have been followed as described.

For equity mandates, this usually results in the selection of managers who are style agnostic and who manage their funds in a high-conviction, unconstrained manner.

A strong emphasis is placed on meeting the fund managers in person prior to making the investment decision, as we seek to build long-term relationships.

Square Mile head of risk based solutions research Alex Farlow: It does not differ significantly from how we look at any other fund.

We like to see a clear and tangible performance objective along with a demonstrable track record that is supported by a robust and repeatable investment process.

We also consider the experience of the investment team, which should be sufficiently resourced to cover the style and structure of the strategy, together with commitment and support from the parent.

However, this doesn’t necessarily mean a large team.

How do you decide the right balance of diversification?

Kilpatrick: We manage a range of risk-managed funds that are aligned to different risk profiles, ranging from defensive to progressive.

The funds are run as a family so that there is a high degree of commonality of holdings between the funds. Each fund is managed such that a defined upper limit of expected volatility is never breached.

Having a large number of asset classes does not guarantee a diversified portfolio

Hughes: There is no magic answer to the right level of diversification but what is important is having a good understanding of the exposures and sensitivities in a fund and understanding what risk controls and monitoring are in place to oversee these.

Sometimes, it is easy for a manager to gain unintended biases in a portfolio, particularly when working on a multi-asset basis; being able to look through the portfolio and identify these is therefore an important part of researching this space. We want to see good levels of understanding from the managers on these issues and clear transparency around them when communicating the strategy.

Farlow: While we like funds that have a flexible mandate, it does not necessarily follow that they will provide the best risk-adjusted returns for investors. Diversification is about holding assets which will provide different levels of returns at different points of the market cycle. Having a large number of asset classes does not guarantee a diversified portfolio.

We are comfortable with funds which only hold a small number of asset classes provided these are uncorrelated and provide an offset for one another.

What type of investors are best suited to multi-asset funds?

Farlow: We think multi-asset funds are suited to most investors, though we would probably exclude investors at either end of the risk scale as they are probably best suited to cash (at the lower end) and specialist funds (at the upper end).

Kilpatrick: Multi-asset funds are an excellent solution for those investors who do not have the time, expertise or inclination to manage their investments directly. Some multi-asset funds will aim to beat a specified return hurdle while operating within a defined risk framework. Such funds help the investor to consider their own risk and return objectives.

Is there any type of investment you won’t use as part of a multi-asset fund?

Hughes: We are open-minded about the types of investment strategy we use and like to consider each on their own merits. However, we will only use multi-asset solutions where we see clear evidence of a capability in each of the asset classes that a manager is looking to use.

Kilpatrick: Non-mainstream pooled investments come under the umbrella of unregulated collective investment schemes and will never be bought. We also dislike structured products as they are difficult to price and the associated cost structures are often opaque.

Farlow: We do not consider funds which do not have a high level of liquidity and are not daily dealing.



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