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Market malaise makes case for diversification

Diversification in a client’s portfolio is key in establishing an investment strategy to deliver over the longer term, especially in times of market turmoil.

Many IFAs look to deliver diversification through multi-asset solutions and the popularity of multi-manager is set to rise.

There has been plenty of recent evidence in favour of the case for diversification.

Many equity-focused portfolios would have seen performance fall since summer 2007 but multi-asset fund of funds, holding a mix of non-correlated assets, have posted positive results, says HSBC Investments.

HSBC’s Open Global Return fund – a globally diverse fund that can hold a mix of assets, including property, commodities and hedge funds, in addition to traditional asset classes such as equities and bonds – has posted a positive gain during the recent market malaise.

Since inception, in November 2006, to February 29, 2008, the HSBC fund has posted a 7.72 per cent bid-to-bid gain, compared with the Investment Management Association balanced managed sector average of just 1.83 per cent.

Fund management firm Tactica makes the point that returns from a multi-asset portfolio are likely to be less volatile than those from a portfolio focusing on a single asset class as well as potentially higher over the longer term.

The findings from a poll of 904 IFAs conducted by Gartmore, M&G, Newton and Schroders, shows 58 per cent are looking to recommend multi-manager funds. Research by Resolution Asset Management and Simply Biz reveals that 50 per cent of IFAs plan to boost the amount of assets they place with multi-managers this year.

Resolution Asset Management director Jonathan Polin says: “Multi-manager funds are forming an increasingly important part of IFAs’ client portfolios and there is no doubt that this trend is set to continue. With alternative assets poised to play a growing role in multi-manager funds, I believe this form of investment will only grow in popularity.”

Multi-asset portfolios under one wrapper can offer a relatively cost-effective approach for investors.

Hargreaves Lansdown head of financial practitioners Danny Cox says: “If you are building a portfolio of retail funds, then using multi-managers is probably the best way to do so.

“The balance of a portfolio can be achieved without the use of a multi-manager as you can buy the same funds individually but the costs are lower.

“Multi-managers are often able to buy funds at institutional rates, or creation price, which provides a far greater discount on standard unit trust pricing and spreads.”

In the case of Hargreaves Lansdown multi-managers, the creation price spread is typically less than 0.5 per cent, mainly due to economies of scale, says Cox.

Tactica also makes the point that multi-asset solutions can free advisers from the need to undertake exhaustive and expensive research to ensure the portfolio is properly structured and balanced. This can be left to the management team who will also constantly rebalance the portfolio.

Cox says: “One of the key advantages in getting a multi-manager to provide all or part of a portfolio is that the manager will understand the underlying holdings of each trust.

“It is common for the good fund managers to like the same stocks, so it is important to understand the degree of overlap from one fund in the same sector to the next.”

Identifying the underlying holdings consistently when running a portfolio takes time and effort so outsourcing investment management can be effective.

But Torquil Clark investments director Philippa Gee believes that advisers can get diversification right without turning to multi-asset offerings.

She says: “They have their part to play but advisers are perfectly capable of handling a detailed portfolio structure and getting it right. They should be capable of putting together a portfolio that exactly mirrors their clients’ requirements.”

Gee considers that outsourcing diversification is just one option among many alternatives and how far it is appropriate depends on the adviser’s capabilities and the client’s demands.

In addition, it can be argued that multi-manager fund of funds are handing over what was once a key plank of an adviser’s service proposition, devaluing their role.

However, Cox says: “For me, an adviser is a financial planner. A financial planner’s responsibility is to help a client understand their goals and objectives and has the skills and wide range of knowledge to align their finances accordingly.

“It is unlikely that a financial planner will have sufficient time or knowledge to be able to offer fantastic financial planning and advice, yet at the same time also manage a client’s portfolio to the same level of expertise as a dedicated multi-fund manager,” he says.

He adds that outsourcing work to experts is a key part of the planner’s role, whether it is tax advice, legal services or investment management.

“Far from devaluing the adviser’s role, this approach enhances it and improves the service for the client,” he says.

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