Multi-asset funds have been growing in popularity. The RDR will mean the regulator paying closer attention to the suitability of investments and the thoroughness of the selection process, so the funds are seen as an attractive form of outsourcing.
Rather than paying the high fees or meeting the asset levels that discretionary fund managers demand, multi-asset funds aim to offer diversity at a lower cost, for those with less money tucked away. It’s clear to see why their appeal is high.
IMA figures on fund inflows, shown in Graph 1, highlight this gradual rise in popularity. While the impact of the recession is shown in the data at 2008 compared with 2007, the popularity of the funds has not diminished over the longer term. By 2009, both sales and funds under management hit higher marks than 2007, rising further in 2010.
While on first impression it appears that popularity dwindled in 2011, compared to 2010, this was indicative of a trend seen across the industry, not just affecting multi-asset sales. Regardless of this blip, funds under management in quarter one of this year, the latest data available, is 158% of the 2007 year-end high.
With more launches to market in recent years and increasing interest from IFAs and investors alike, this popularity shows no signs of abating. But there are concerns that multi-asset is the next fad that providers want to throw their marketing money at and that advisers want to get involved in.
Understandably, fund managers in the sector dispute this. Justin Onuekwusi, manager of the multi-asset range at Aviva Investors, says, “You have to assess if it’s a trend or if it’s a fad. But when you look that funds have been managed this way since the 80s, if it’s a fad it must be a long-term one.”
However, if more providers continue to move into the market, as expected, the differences between funds will narrow and the risk of the true intention of the funds may be lost, making advisers’ jobs far harder. As with previous ‘’trendy’ sectors, only time will tell if the products can go the distance.
Passive vs active
The active versus passive will rage longer than the 100-year war and multi-asset does not escape this. A new raft of multi-asset funds are emerging that use passives to access certain markets, the goal being to get exposure at a lower cost than active. But as ever, fund managers disagree on the approach.
Onuekwusi is fan, saying that each of his range of five funds tend to be 70% passive and 30% active, although this is not fixed. He adds that it is important that the fund remains cost effective and competitive. “I believe in blending active and passive to get a risk-adjusted return,” he adds.
With more multi-asset funds being launched it is likely that this increased competition will bring price reductions, as funds aim to be cheaper than rivals. For many, it is then natural that passive will play a larger role.
One of the main tenets Onuekwusi sticks to is that a multi-asset fund should be truly diversified and access a wide range of markets. He argues that by using passives he can reach far more markets, without costs spiralling in the way that they would were he using active all the time.
Andy Brown, investment director of M&G, adds that some markets are so well researched that active cannot add any more. However, he concedes that this is not always the case and an entire passive portfolio would not work.
However, David Hambridge, investment director at Premier Asset Management, says that his issue with trackers is that you own the “good, the bad and the ugly”. So rather than owning the key stocks the manager believes will outperform, the fund is populated by those that shoot the lights out and those that plummet.
His other argument is that trackers are based on indices that are often distorted. “The FTSE 100 is a horribly skewed index. The companies that are in it are ex-growth and long term are not a good option.”
Although for Onuekwusi using trackers is not the only tool in reducing costs. The Aviva Investors multi-asset range also invests in-house, as well as externally. “At the moment we have more internal funds than external, which is primarily driven by cost. But the internal funds have to stand up to due diligence and purpose.”
A criticism levelled at multi-asset funds is that most operate a fund of fund or manager of manager structure. Meaning that rather than investing solely in direct assets, they invest in funds or managers to carry out that portion of the allocation. This means that double charging can occur – whereby the multi-asset fund manager charges as well as the underlying manager.
However, the economies of scale that the larger multi-asset funds have when investing in these sub funds, means that costs are reduced. So while two sets of fund fees are charged, the underlying are cheaper than normal. Premier’s Hambridge adds, “There has never been double charging, we still pay significantly less in fees as we use a supermarket, bulk-buy approach.”
The issue with fees is also costs versus value. While some may be perfectly happy to pay lower annual charges, if they get far lower returns than their neighbour paying 1% higher each year, they are unlikely to be singing all the way to the bank. Put plainly, paying more is fine if you get more in return, but that’s a big if.
Outsourcing for good?
Much has been made of the need for IFAs to outsource their investment decisions in preparation for the onslaught of RDR. The thinking is that with a greater emphasis on ensuring that products are suitable for clients, post-RDR, more advisers will move away from the stock-picking element of their work and instead place their business in outsourced solutions, from multi-manager and multi-asset funds to model portfolios and discretionary fund managers.
But the industry has not reached a consensus on the issue. Some feel that to shed this stock or fund picking ability is to lose a key part of the job, while others feel that handing over this business to another firm will lead to them losing their clients.
Advocates, however, state that offloading this side of the work enables them to focus on the areas where they can really add value and get back to the roots of full, holistic financial planning.
It seems that, while in the minority 12 to 18 months ago, the latter group are taking hold. Premier’s Hambridge says, “Where we used to have to convince IFAs on outsourcing we now hardly ever have to. They now accept that outsourcing is a good option but they are now looking at how best to do it.”
And this is crucial. While outsourcing may seem like an easy – and suitable – solution, the FSA has already warned that it should not be seen as a one-stop-shop. In its guidance issued in April this year, entitled ‘Assessing suitability: Replacement business and centralised investment propositions’ the regulator warned that advisers should not just use one proposition for all clients, in particular stating that it looked poorly on shoehorning clients into products. It added, “We expect all firms providing investment advice to act in their clients’ best interests. We will continue to take tough action where we identify poor practice.”
This means that far from picking one discretionary manager or multi-asset range for clients, advisers need to ensure that the proposition is suitable for each and every client. This seems simple enough, and comes back to the basic fundamentals of financial planning. But with so many options on the market, how do advisers pick?
Pick of the crop
This is a key issue with all outsourcing options and particularly facing multi-asset funds. Though not a new concept, multi-asset strategies have been adopted by an increasing number of providers lately and this does not seem set to stop.
Aviva Investors’ Onuekwusi adds, “I think we will continue to see more multi-asset providers come to the market. This can only be a good thing for investors as more providers brings increasing competition on performance and lower fees.”
But with a growing marketplace, the job of sifting through the funds, selecting the right one and then being able to demonstrate to the FSA why that one is more suitable is no easy task. Advisers need to look under the bonnet and check how the fund operates, rather than assuming multi-asset means a homogenous group of funds.
A large number of multi-asset funds are also linked to risk profiles. In a bid to allow advisers to demonstrate suitability on another level, providers are aligning their funds to a risk rating, as determined by risk assessment tools. While on the face of it this seems helpful, the myriad ways in which this can be done serves to only muddy the marketplace further.
In addition to the issues with alternative risk assessment ratings and tools being used, funds are also retrospectively risk-rated, rather than being designed that way. The argument with the former is that an arbitrary risk rank is applied to the fund, rather than it being managed to hit that limit.
The same argument applies to multi-asset funds that are risk-rated rather than risk-targeted. The former have a rating applied to them, while the latter has a risk target that it aims for, the argument being that it is more consistent in its risk rating.
As advisers have to show ongoing suitability, proponents of risk-targeting say that the funds offer a more reliable solution, as it constantly aims to stay within risk limits, rather than being assessed at one point in time.
Onuekwusi classifies the current structures for multi-asset funds as either managing the fund in relation to peer group, targeting a return based on a composite benchmark or cash plus, or running it to a targeted risk return. He believes this is where many of the new fund launches will be.
Fadding about
A concern is that multi-asset is seen as the latest fad, with providers wanting to jump on the bandwagon. But Phil Reid, head of UK external distribution at HSBC, said that the marketplace will weed out weaker products. “The market is sophisticated and will judge whether something has worked or not. So if a company launches a ‘me too’ product that would be evident.”
That said, there is a need for advisers to delve into the actual holdings of the fund and see if it truly is multi-asset. Anecdotal reports of a fund being called multi-asset but only investing in cash, equities and property highlight the real need to examine assets.
As Premier’s Hambridge says, “Saying a fund is multi-asset is a bit like saying something is a pension or an ISA, it’s just a wrapper. It’s what’s in it that counts.”
Patrick Connolly, a financial planner with AWD Chase de Vere, says that this is particularly the case when considering the type of investors who are put in these funds. “Multi-asset funds are most appropriate for cautious investors, which is why investors need to understand the choices that managers are making.”
What’s in the figures?
The relative newness of multi-asset funds is shown in the lack of performance data at 10 years, as shown in Table 1. The Table shows all funds called multi-asset listed in the IMA’s data, as there is no one sector that they fall into. For this reason each fund’s sector is also listed, although the majority fall into the Mixed Investment 40-85% and 20-60%, or the old cautious and balanced sectors, as they are more commonly known.
Two of the longer-running funds are Premier’s growth and distribution funds, but these only converted to multi-asset in 2008, which investment director David Hambridge admits was pretty poor timing. However, by making the move Hambridge says that so many more assets were made available, where previously the funds were limited to equities, bonds and commercial property.
The variety in the holdings and strategies of the funds is highlighted in the performance data. Looking at one year, the best and worst return on a £1,000 investment range from £894 for the CF Absolute Return Cautious Multi Asset Income fund to £1,025 for Fidelity’s Multi-Asset Defensive fund.
This gap in performance is heightened at five years, when the worst AGR of -3.3% is a long way off the top performing Fidelity Multi-Asset Strategic fund 3.6%. While these gaps in performance inevitably occur between funds in all sectors, even those with more closely aligned strategies within them, it underlines the importance of researching the strategies and holdings of each fund.
Hambridge highlights this when talking about the range of multi-asset funds that Premier offers, which includes a growth and income fund. He adds that first and foremost the funds are run according to these criteria, simply using the benefits of the wider investment options that multi-asset offers.
The cautious nature of multi-asset funds is born out in the discrete performance, with the drops post recession not being at the crippling levels that others have seen. While losing an average of -3.4% in 2007-08 and -12.5% in 2008-09 would not please people in normal circumstances, under such crippling conditions and when other sectors lost far more, it demonstrates the benefits of diversification.
What’s in a name?
Diversifying, allocating across a range of different routes and spreading risk are the basic principles for investing. They are also the basic principles for multi-asset funds. The theory behind them is sound, but as with everything, the proof is in the execution.
With providers seeing this as the next big opportunity to get fund inflows, advisers need to be wary that they are actually buying into the fund and strategy that they think they are. Rather than seeing multi-asset as the final solution, instead it should be seen as a means to access certain markets. Just investing in a wide range of assets is not enough.
With RDR and the regulator putting suitability centre stage, the need to scrutinise these funds is even more pertinent. To demonstrate that the fund is at the correct risk level, has appropriate underlying assets, and is cost effective is more crucial than ever. Because this doesn’t look like fad that going away any time soon.
