For investor and adviser alike, the investment space is jam packed with fund names and labels and descriptions and it is fair to say that this creates potential confusion and misinterpretation.
A good example of this is the phrase multi-asset fund. Several years ago, I received a call from a financial journalist who asked me for comment on a new multi-asset fund being launched. I was intrigued by the terminology and during our conversation I ventured to suggest that any investment-oriented IFA would always want a range of assets within a portfolio and constituent fund selected for inclusion in a client portfolio.
No need to highlight the old and well proven adage of ‘eggs in different baskets’ I thought. The journalist seemed rather nonplussed by my comment and intimated that I was missing the point. We concluded the conversation amicably but still at variance in our opinion of what a multi-asset fund was and why indeed it was a sufficiently different investment proposition coming to market to merit attention.
Time has passed and the phrase multi-asset is now common parlance among IFAs. Diversification by investing across a selection of equities, bonds, property, private equity, hedge funds commodities is the essence of the approach that is promoted by multi-asset fund marketing as being the way to invest, handle the shocks and scares of an increasingly volatile market while managing to deliver returns in different economic cycles and environments.
This will only work and be successful if the balance of assets within the fund is well researched and constructed but there has to be more to it than that, for surely that is what a well-planned and researched investment portfolio should do anyway as a consequence of smart asset allocation and fund selection.
The question we should consider is: “Have multi-asset funds added value through adding diversification to the portfolio planning that advisers conduct with and for their clients?” I suspect that the appeal of multi-asset funds is part and parcel of the move among many IFA firms to hand over the investment decisions to a third party, in an attempt to mitigate risk surrounding their advice to their clients and hand the responsibility to that third party. This is fraught with potential problems. I attended a recent prestigious and always useful industry event in London and at one of the workshops - on multi-asset funds incidentally - and got into conversation with another delegate IFA.
I asked him about his approach to fund selection for client portfolios and he quickly replied that he does not do it anymore and uses model portfolios produced by a third party. My next question was why did he take the step to stop fund selecting and hand it over to this third party? He looked at me and replied that it was a simple decision - he had decided he no longer wanted the risk inherent in giving investment advice on fund selection and had passed the risk across to the model portfolio firm.
Far be it from me to suggest that all he had done was change the nature of the risk rather then removing it - some interesting conversations may well arise in the future about where the buck stops for investment advice to clients. As multi-asset funds gather popularity and
momentum the contribution that exchange-traded funds are likely to make to the content of multi-asset funds is likely to escalate rapidly - low cost, replication, but with varying levels of risk attached to the component assets making up the fund. For example, the attention that the current regulator is showing for use of ETFs in the retail space is only likely to increase in the coming months and the new Financial Conduct Authority - is unlikely to be any less interested in this area of advice - the clue is in the name and focus on the word conduct.
Trivia
We all are painfully aware that markets have been extremely challenging for investors over the last three years and it is interesting to see where performance if any has come from funds other than the much vaunted multi-asset offerings.
Question: What was the best performing sector over the last three years? Take a moment to reflect before moving on.
Answer: UK Smaller Companies - with a return of 115.5 per cent followed by Technology and Telecoms delivering 104.3 per cent.
Surprised - you may well be. It becomes even more interesting when you move the time frame out to five years - everything changes with top sector Technology and Telecoms returning 64.8 per cent and followed closely by Asia Pacific ex Japan posting 57.5 per cent.
So where do the multi-asset funds fit into the picture of offering any better diversification while delivering enhanced investment returns? If we are to believe that multi-asset offers extra levels of diversification, then it would not be unreasonable to expect higher reward but with lower volatility. I would also expect to see multi-asset funds showing significantly lower standard deviation numbers but I see no evidence for this.
There is a genuine problem here in making comparisons between multi-asset funds and anything else because of the range of the holdings within the funds. However we can make some sense of the market if we look at the Mixed Investment 40 per cent to 85 per cent shares ‘sector’ and how these multi-asset funds have performed.
For those of you reading and thinking that this smacks of Balanced Managed under another name you are dead right, so do not get hung up on the label. Over three years, the sector has returned 48.2 per cent and over five years 12.9 per cent - so on both timeframes the multi-asset story is less than convincing overall despite the seemingly more diversified approach offered by the funds. Even when you drill down and look at individual funds the argument still lacks depth or conviction for me - CF Cygnus certainly showed the way to other multi-asset funds with a return of 82.2 per cent over the three years but is less impressive over five years at 26.6 per cent return. When compared with the returns made to a portfolio from such well run funds like Marlborough Special Situations, with a performance of 152.6 per cent over three years and 44.8 per cent over the more important five-year horizon, the case for individual fund selection is still in my opinion overwhelming and should not be based upon a label but rather the fundamentals of the fund track record.
As and when a multi-asset fund scores highly as a result of thorough and objective research compared with other funds, then of course it would merit consideration for inclusion within a portfolio. In the face of increasing market and regulatory change, it is very easy for advisers to lose sight of what it is they do to add value to their clients. When considering an investment strategy and process to use, IFAs still need to stick to their guns in terms of what they do well - whether investment-oriented or some other specialist area of expertise - and promote their story loud and clear and drive forward the value and benefit of independent advice.
Nick McBreen is an IFA at Worldwide Financial Planning
