Clients generally are rational in the long-run. This means that clients investing in multi-asset funds over time will decide whether holding such funds makes them money in a cost-efficient way.
For multi-asset funds, most of which combine a broad range of shares, bonds, commodities and other asset classes into a blended, diversified offering, competition over the next business cycle is likely to come mainly from investment solutions with a very big approach or a very small.
At the big end of the spectrum, one-stop-shop investment firms promise to cover all of an investor’s needs, giving tax and estate planning, extending mortgages and credit lines, and providing diversified money management services. At the small end of the spectrum, hardy, do-it-yourself investors will have direct access to rapidly evolving financial markets, with pretty much every conceivable asset class available at perfectly reasonable cost, whether through exchange- traded products or regulated absolute return funds. If an investor can hand over to a one-stop-shop everything to do with personal finances, or directly manage his or her savings at extremely low cost, what is the added value from investing in a multi-asset fund?
Traditionally, the reasons for choosing multi-asset funds have been summarised in “performance” and “complexity”. For ”performance”, it is certain that multi-asset funds, like all independent funds, prosper or fade with their investment returns, which are carefully and publicly measured against demonstrated risk, benchmark returns, and peer performances. Investment returns stand out with remarkable clarity as the be all and end all of a fund. Fund performance neither gets lost in a host of additional services, nor buried in a web of affiliated products as is sometimes the case with one-stop wealth management solutions.
It is far easier for an investor to redeem an underperforming multi-asset fund than to replace an entire web of wealth management web services including custody, brokerage, advice and legal infrastructure. As to ”complexity”, individual investors face a daunting task in trying to build a portfolio across multiple asset classes. The usual requirement is statistical analysis relative asset class movements over decades, informed estimates of how assets are likely to perform over the next global cycle, evidence for how higher risk taken in any asset is likely to translate into a higher return, and some way to sift the wheat from the chaff among securities and managers while wading through conflicting advice from all quarters. Here again, it is simpler, and often wiser, to leave such specialist tasks to multi-asset fund managers.
The greatest challenge for multi-asset funds may soon come from regulators and a market showing great interest in having investment management products needs to be very transparent as to their inherent investment risks. More and more wealth managers will have to demonstrate how they measure, package and present investment risk to their current and potential clients.