Multi-assetFeb 25 2013

Is multi-asset income the fund of our times?

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For advisers, there have been two identifiable trends from the past 12-18 months.

The first – client hunger for income – is a result of the low interest rate environment and excessive monetary policy from Western governments. The second, however, stems from regulation.

The Retail Distribution Review has precipitated predictions of a surge in outsourcing from adviser businesses, either to multi-managers or discretionary managers, to allow advisers to hone in on the financial planning needs of their clients.

Multi-asset funds, as a result, have become seen as a popular way of ‘outsourcing’ the asset allocation decisions.

As these two trends blur and merge, multi-asset income funds could potentially become the choice de jour for advisers and their clients.

David Aird, managing director, UK client group at Investec Asset Management, explains: “This isn’t an argument as to whether clients should be in equities or bonds. This is about producing a product for clients that uses every available building block – the ability to look at bonds, high yield credit, emerging market debt, high quality equities with phenomenal dividend streams.

“It is philosophically sensible - the best way to generate a realistic yield is to have a diversified portfolio where you are not putting yourself in a straight jacket by only using bonds or only using equities.

“An asset allocation skill in knowing how to blend a multi-asset portfolio between these sources of income gives you building blocks that allows you to smooth the income for your clients over time.”

What’s on offer?

The number of multi-asset income funds on offer is growing, but some of the oldest in existence come from well-known investment houses such as Fidelity, JP Morgan, Investec and Old Mutual Asset Management, among others.

The latter launched its four multi-asset products at the end of last year for head of multi-manager John Ventre. The Generation range, according to Mr Ventre, address a “gap in the market” and offer investors both capital growth and a certain level of income, depending on the fund chosen to invest in.

He says: “With returns on cash and government bonds at, or near, historical lows and highly volatile equity markets, we believe that these products will form a complete outsourced solution to complement our Spectrum funds and prove to be highly popular with investors who are looking for income.”

The Generation range particularly targets those investors that are looking to enter in to income drawdown, but have concerns as to whether their pension will last.

In April last year asset management giant Schroder Investment Management entered the multi-asset income market with a global offering domiciled in Luxembourg and managed by Aymeric Forest. The fund aims to pay a distribution of 5 per cent a year in equal quarterly or monthly installments with an expected 7 per cent total return per year over a full market cycle.

Choosing the right fund

With the number of multi-asset income funds available to investors now so vast and expected to swell further this year, how should advisers go about picking the right one?

Mr Aird says: “There are two golden rules: that the income a fund delivers should be realistic and that it has the potential to grow over time.

“What we don’t like is eye-watering artificial income that is generated at the significant risk of capital. It may seem terribly attractive to generate a yield of between 7-9 per cent, but if you look at what is being generated by the main asset classes at the moment, then any solution offering 7-9 per cent yield is definitely taking excessive risk.”

By way of example, the Investec Diversified Income fund has a yield of 5.5 per cent, which Mr Aird considers to be “realistic if you look at the underlying assets”, made up of good quality equities with reliable dividend streams such as Vodafone, Nestle and Unilever, Malaysian, Turkish and Mexican government bonds, and high yielding corporate bonds issued by companies such as Ladbrokes.

“We are trying to align the income product with the realistic needs of the underlying investor,” he adds. “If we carefully manage those different buckets, we can generate a yield that is just over 5 per cent and if you compare that with cash yields, it is good.”

Matching returns to risk

The main risk for advisers, according to research carried out by eValue, however, is that they are in danger of making unsuitable investment recommendations by not matching funds with their clients’ risk profiles.

Bruce Moss, strategy director of the software provider, explains: “The problem is that the relative riskiness of different types of asset does not vary consistently with investment return – cash deposits become more risky as investment term increases, whereas equities become relatively less risky and the riskiness of a bond fund initially falls and then starts to rise as term increases.

“What this means is that the riskiness of multi-asset funds relative to one another will vary with term according to the makeup of the fund, for example, the relative weightings of equities, bonds and cash.”

Risk profiling is something that the Financial Services Authority recently waded in on, warning advisers of the dangers of risk profiling and in response many advisory firms have set up risk-rated centralised investment propositions, or CIPs, using multi-asset funds and model portfolios aligned to the output from risk profile questionnaires.

Mr Moss, however, argues that these risk rates CIPs need to be “term dependent”.

He adds: “Worryingly, rather than do this, many firms have set up single solutions for each risk profile and applied the same adjustment to these different solutions to take account of term – usually increasing the client’s risk profile as term increases.

“Our research shows that this approach is completely flawed and will lead to recommendations of inappropriate investment solutions.”