Some might question whether all funds are multi-asset funds of some sort. This seemed true to an extent as many funds hold more than one asset class, so can all funds be considered multi-asset funds?
The answer is to an extent yes. Funds that invest in government bonds, equities and property, in themselves can be classed as multi-asset funds. Even multi-manager funds and fund of funds, which have the narrowest of differences between them, can also be described as multi-asset funds.
However, what makes the distinction a little clearer is that multi-asset funds can invest in a much wider range of asset classes, particularly with the use of derivatives and more esoteric investments.
The IMA generally has a few sectors that cater predominantly for these funds of which four in particular stand out. There is the Mixed Investment 20 per cent to 60 per cent shares sector of which funds within this sector must adhere to 20 per cent to 60 per cent of equities exposure as well as a minimum of 30 per cent in fixed income/cash holdings.
There is the Mixed Investment zero per cent to 35 per cent shares sector that has a maximum 35 per cent equity exposure and a minimum 45 per cent fixed income/cash requirement. There is the Mixed Investment 40 per cent to 85 per cent shares sector that has a minimum 40 per cent equity exposure and no fixed income/cash limits. And finally there is the Flexible Investment sector which has no predefined limits so managers have full discretion over choosing asset types.
All of these sectors are very popular with the investing public with the IMA Mixed Investment 20 per cent to 60 per cent shares normally coming out on top (this sector was the most popular in June 2013, according to the IMA).
The obvious reason for the popularity of these funds is due to one thing in particular. It is also the primary reason for what the whole theory of portfolio management is based upon: diversification.
By having your money spread out among a range of investments with little correlation with each other, enables an investor to reduce the risk of losing their wealth. It reduces the amount of unsystematic risk in the portfolio leaving only systematic risk, the risk that no amount of diversification can get rid of.
Within the multi-asset universe, the level of diversification ranges to cater for the differing risk appetites of the client. Or put differently there are a range of funds available for those who want to achieve differing levels of returns. The main reason for this is because without taking more risk, the chances of getting higher returns are slimmer.
There are funds titled Cautious for those who prefer to take on the least amount of risk. Typically these funds will hold a lot of money market instruments as well as cash and sovereign debt instruments. For the more adventurous, and more prone to risk taking, there are the Adventurous funds that have high amounts of equity exposure in order to achieve the higher rates of returns, with the more risky going into developing countries. Multi-asset funds that cater for these types of investors are more likely to fit into the IMA Mixed Investment 40 per cent to 85 per cent shares and may also use more esoteric investments such as investments in CDOs and RMBSs.
Most investors though seem to be drawn towards the Balanced profile, of which there is a moderate amount of equity exposure along with fixed income. The sector Mixed Investment 20 per cent to 60 per cent shares covers these funds pretty much. The main reason investors tend to choose these Balanced funds is because most people tend to fit somewhere in the middle of the risk spectrum.
Investors want to get a decent return on their investment but do not want to fall into the fallacy of gambling with their futures. The preservation of capital is never just a plausible option as inflation erodes away over the years and the opportunity costs of investing elsewhere are always prevalent. So people tend to choose investments that will try to achieve a decent level of return for the future without taking too much or too little risk.
So can investing in these balanced funds do the job required? To see how some of these funds have done over the years, I looked at a few past performance figures. Using statistics from FE Analytics and looking at funds specifically in the Mixed Investment 20 per cent to 60 per cent sector, the multi-asset fund that performed the best over a one-year period is the Invesco Perpetual European High Income Fund, which generated a 22.40 per cent return. Over a five-year period, the CF Ruffer Total Return Fund came out on top with a 67.30 per cent return. Not bad for an average return of 14 per cent a year considering had you invested in a FTSE 100 tracker five years ago it would only have increased your wealth by 14 per cent over the same period.
Comparing it to the top multi-manager funds also within the same sector, then the Hargreaves Lansdown fund does well over a one-year period with a 14.20 per cent return. It did not do as well as the multi-asset fund but generated a much better return than a simple FTSE buy and hold strategy.
Over five years, Henderson comes out on top with a 44.10 per cent return. Again not as good as the multi-asset fund but much better than the FTSE alternative. So both multi-asset funds and multi-manager funds have come out on top over both time periods. So which do you buy? Well by looking at just figures alone, the multi-asset funds fared better over both time periods, however that could be down to the different strategies or skills sets of the different fund managers that I have used in the example. To bypass this I have provided a few other reasons which might help to explain their outperformance.
• Diversification at a lower charge. Diversification is common between the two. Both offer access to a range of asset classes, which combined with low levels of inter-correlation, will allow smoother and less volatile returns. However, multi asset funds generally come in at a much cheaper bracket as they do not have the extra layer of charges associated with multi-manager funds so can allow investors to gain diversification at a cheaper cost.
• Multi-asset funds use a team of internal investment professionals, whereas multi-managers typically employ outside fund managers to manage their investments. This can allow ideas for investment strategies to be much easier and ideas about market movements to be communicated much more easily and freely between each other, which can allow greater cohesion and allow decisions to be made much more easily which can positively affect the funds’ performance.
Whichever of the two structures are chosen, remembering that the returns are not always guaranteed is the key thing. However, by employing a diverse range of assets and having managers who are experts in their asset classes can help to reduce the downside risks and can provide a stable platform into which to place your savings.
Randeep Gill is a research analyst for Capita Financial Software
Key points
* Funds that invest in government bonds, equities and property, in themselves can be classed as multi-asset funds.
* The obvious reason for the popularity of these funds is due to diversification.
* The Hargreaves Lansdown fund does well over a one-year period with a 14.20 per cent return.
