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The fine line

Chris Salih considers what really lies behind multi-asset funds.

Multi-asset funds are rapidly multiplying into the must-have product for fund managers.

The premise is simple enough – exposure to a basket of asset classes for consistent growth and downside protection through diversification.

With equity markets having enjoyed a long bull run and bonds in the doldrums for the past couple of years, many investors are unclear about where to invest. Throw in the spectacular returns from property in recent years and the choice is even more confusing.

The bulk of multi-asset funds offer exposure to all three of these asset classes, with many also offering an extra layer of diversification by investing in commodities or private equity.

M&G cautious multi-asset fund manager David Jane says demand for these types of products is high.

He says: “Most investors want two things from their investments – a decent return with as little risk as possible. The best way to achieve this is through diversification across different asset classes such as equities, bonds and property.

“Returns from equities, bonds, property and cash have differed widely over the past 10 years. Having the right mix of assets – holding the best-performing assets and avoiding the worst-performing – is the key determinant of returns while protecting your portfolio against a fall in any one asset class.

“Investing in property can, for example, help investors be better diversified because returns from property are lowly correlated to those from equities and bonds, while still offering an attractive risk/reward profile.”

Earlier this year, both Fidelity and Investec launched multi-asset funds. Fidelity’s fund is headed by the group’s director of asset allocation Trevor Greetham. He analyses historic trends as a guide to determine the optimum asset mix at different stages of the economic cycle. The equity portion of the portfolio will also be weighted towards the sectors and regions that tend to do best during the different phases of economic growth.

Greetham says: “The fund is a departure from the conventional breed of cautiously managed funds as it combines bonds, cash and equities with property and commodities. In addition, my ability to change the asset allocation according to economic conditions means it has the potential to perform well in both bull and bear markets.”

Greetham’s all-terrain global fund uses Fidelity’s “investment clock”, which breaks the market cycle down into four parts – recovery, overheat, stagflation and reflation. Market indicators will then show which of these phases best describes the current environment before choosing the asset classes that are likely to perform best at this point.

Greetham says: “Right now, our model indicates that the world economy is set to decelerate in 2007, which suggests that global bonds will perform better than equities or commodities. Besides an overweighted position in bonds, initially this fund will have exposure to developed market equities in Europe and North America.”

However, while these funds do offer exposure to a number of asset classes, there are some downsides.

BestInvest head of commu-nications Justin Modray believes there are issues over fettered funds, total expense ratios and whether many of these vehicles really are multi-asset.

He says: “You will find that a lot of these funds are just fettered vehicles that do not offer exposure to the best portfolios in their fields. Many are quite content to only offer external exposure to those asset classes – with commodities and hedge funds coming to mind – that they do not offer in house. Then you have to consider that some multi-asset funds are literally just equities, bonds and property.”

As for TERs, Modray says: “I would take note of any TER that was above 2 per cent, regardless of what the fund offers. Advisers have to be wary that if they are paying a bigger TER that they are doing so in the knowledge that they are receiving top-notch diversification.”

Modray is a fan of Midas Capital, which set up a balanced growth multi-asset vehicle in April 2002. The group has access to seven asset classes, including alternative investments, property, structured products and cash, as well as investing in external funds and debt securities. The fund has a low TER of 1.48 per cent.

Hargreaves Lansdown head of research Mark Dampier believes the recent correction could provide a useful barometer of how these funds perform in the future. He says: “The whole idea of multi-asset funds outperforming in all market conditions is a facade, like traditional multi-manager funds, they limit the downside as well as the upside.

“It will be extremely interesting to see how these products come out of this recent correction and I would have loved to have seen what their 10-year track record would have been like from 1997 to today.”

As for the future, Dampier says: “There is definitely a space for them in the market. The worry is that these products have been forced down advisers’ throats far too quickly and as an idea it could run the risk of being overcooked.”


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