Is the multi-asset market overcrowded?
The use of multi-asset funds by advisers has been steadily increasing in the past few years, largely as a result of the RDR, but also as a means to diversify clients’ portfolios during times of economic turmoil.
Research carried out by Baring Asset Management into the best and worst performing asset classes in the past five years demonstrates the need for multi-asset managers to be able to move quickly into and out of asset classes.
The report illustrated, for example, that last year was a difficult year for emerging markets, yet in 2010 emerging equities was one of the top-performing asset classes. Similarly, UK gilts performed strongly in 2011, yet were among the worst in 2009 and 2010, while European equities have also been on a rollercoaster ride over the past five years in terms of performance.
Ben Seager-Scott, senior analyst at Bestinvest, outlines: “Multi-asset funds have been growing in popularity in recent years as investors have been demanding investment solutions that self-contain some element of asset class diversification. By getting the asset split right, these funds should provide returns that have lower volatility assuming the asset blend has a suitably low correlation. There are already a number of funds in this area, and the increased investor demand is likely encouraging others to get in on the act.
“Diversification of asset classes is important for investor portfolios as cross-correlation should help dampen volatility while still providing growth with different asset classes performing in different market conditions. When looking at these funds, it’s important to look at the overall cost that is being paid – which is often higher than single-asset funds. Investors should also look at the management teams to ensure they have adequate expertise to cover the different disciplines involved.”
Ben Willis, investment director and head of research at Whitechurch Securities, explains that regulation is also forcing IFAs to rethink their propositions and adapt their business models, a key part of which is to show a clear and coherent investment process and audit. He adds: “This post RDR vision, I believe, has driven the growth of multi-asset funds, in particular, risk-rated multi-asset products. Indeed, even we have recently announced the launch of three independently risk rated, low cost, multi-asset model portfolios. The launch of these portfolios was very much driven by some feedback from our IFA business partners, who wanted the choice of independently risk-rated investment solutions to match to the potential risk profiles of their clients.
“Due to what the IFA community and the fund providers believe the investment market is going to look like post RDR, this risk-rated multi-asset fund/portfolio market could be very big business. It does not surprise me that many fund groups are launching funds in this area as they obviously believe that the market is big enough to capture client monies.”