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Morningstar OBSR: Why investors must be careful when selecting a multi-asset fund

Diane Earnshaw

In today’s uncertain investment world, multi-asset funds are proving to be a popular choice for advisers and investors. The onset of the global debt crisis over the past four years has presented some of the most challenging investment conditions in a generation. Times are tough and investors and advisers need funds that can deliver regardless of the background. That, of course, is easier said than done, but it is one of the reasons why multi-asset funds are proving popular.

On the face of it they have the flexibility and opportunity to deliver solid returns in a challenging environment. They have the widest investment universe, including equities, fixed income, property and, increasingly, alternative assets. When mixed and managed successfully this range of assets can, in theory, provide diversification and improve the risk return outcome for investors. 

While this may sound good, it is never that easy. Finding good multi-asset funds with consistent track records is a challenge and good multi-asset managers are a rare breed. The skill set and breadth of knowledge needed for an individual to manage a multi-asset fund is considerable.

Equally, having the ability to successfully implement, strategy using in-house expertise implies that an investment house must be good across all disciplines, ie global equities, fixed income, property and alternatives, if they are permitted in the fund’s mandate.

With some mandates, derivative strategy expertise is also required and let’s not forget currency management. It is a big ask of an individual manager and even a single investment house.

Alternative assets can complicate things, too. When used with skill and diligence, these can improve the risk return profile of the fund for investors, especially when the correlation to other assets in the portfolio is low or negative. However, some alternatives lack these characteristics and can actually increase the risk within a portfolio. Many are niche and illiquid and require a high level of due diligence by managers willing to invest in them.

The multi-asset universe is diverse and this presents its own challenges to those who want to use multi-asset funds and compare their performance. Funds vary greatly in underlying structure, management approach and fees so knowing your fund is as important as ever in this space. Some multi-asset funds have a relatively straightforward structure, only investing in long-only strategies and directly in equities, bonds and cash, while others have a much wider asset base including alternative investments. Some of the newer multi-asset funds also have an explicit absolute return objective seeking to deliver positive returns to investors regardless of market conditions, while many remain relative return focused.

Additionally, multi-manager structures are commonplace. Unfettered multi-managers typically come with a higher fee structure but multi-asset funds can have an approach that uses passive investment funds, active investment funds or a combination of the two, which can also influence fees.

More recently in the UK market we have seen the FSA’s retail distribution review influencing adviser behaviour to focus more on risk and there has been the growth of a new type of multi-asset fund, referred to as risk rated solutions. These offer advisers and investors a suite of funds managed using a consistent strategy and approach.

Asset allocation is derived using strategic asset allocation models in order to generate optimal asset allocation for a targeted level of risk. These strategies are gaining market share and are a valuable addition to the investment landscape. However, they remain to a degree unproven given the length of time we have to analyse them and their behaviour.

A rigorous and diligent approach to researching multi-asset funds is crucial in what is a diverse and sometimes complex sector. However, despite the challenges, the advisers are embracing multi-asset funds, not only for their investment credentials but also as business solutions to the problem of asset allocation.

Outsourcing to specialists is proving popular and has been encouraged by a regulatory environment raising the bar in terms of advisers having to demonstrate expertise in the area of asset allocation. In this context the multi-asset sector will continue to grow, but we caution advisers and investors about the complexity of such offerings and encourage them to get to know their fund.

Diane Earnshaw is senior investment research analyst at Morningstar OBSR

Advisers’ views

Adrian Lowcock

Adrian Lowcock, senior research analyst, Hargreaves Lansdown

Multi-asset refers to funds that can invest across several asset classes and fund managers. As such, a good multi-asset fund should target consistency by providing reasonable returns during the good times and shielding investors from painful losses during the bad times. They provide investors with a one-stop shop to get exposure to a wide range of assets, diversification and a long-term investment.

They can be useful for new investors, used as a core holding of a portfolio or for those who want to delegate the work to someone else. But investors should not assume that because a fund is multi-asset it will be lower risk – getting the wrong mix of assets can result in increased volatility. Good investment selection, strategy and asset allocation all depend on the quality of the manager and their team, and this is even more important if it is the only fund you use.

The term multi-asset is likely to be replaced by risk rated in 2013. These funds are basically the same but they also set specific risk targets or parameters they have to meet. This raises some concerns, as over short periods the riskiness of an asset class can change significantly. As such, these funds need to monitor the true risk of an asset, not an historical or presumed risk. Managers need to avoid selling a risky asset after the event and switching to a lower risk asset just before it gets riskier.

Andrew Merricks

Andrew Merricks, head of investment, Skerritt Consultants

Advisers and investors must be comfortable in knowing what is inside a multi-asset fund and what a multi-asset fund can do before they invest in it.

Sometimes having a simple product is good for investors, as this industry often over-complicates things. The problem with simplicity is that in 2008 we saw a number of funds in the cautious managed sector which were constructed purely with equities and bonds and, as we know, both fell together.

These funds fall into the bread-knife concept. You can use it to kill someone or make sandwiches. There is no straight answer. It depends how sensibly managers use the assets at their disposal. These are good products if used the right way, we do not want to see products created purely for asset managers’ sales teams to sell.

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