Obtaining the best multi-asset fund for my client

Mr Priday says questions to ask of a multi-asset fund manager are numerous and varied, but he considers the key questions to be those surrounding the fund’s investment philosophy and its asset parameters.

He says: “Investment philosophy is an important cornerstone of a fund’s process; specific to multi-asset funds, it is important to establish whether a fund focuses on direct holdings of bonds and equities or whether it branches out into regional equities and alternative assets.

“Asset parameters guide investors to a fund’s likely asset allocation; for example, a multi-asset fund’s parameters could be 10 to 30 per cent fixed interest, 65 to 85 per cent equities and 0 to 10 per cent cash.”

When looking for a multi-asset fund that actively harnesses the volatility in a portfolio, James Bateman, head of portfolio management of Fidelity Solutions, says it is important to understand your options.

Mr Bateman says advisers should explore whether a ‘risk-targeted’ or ‘risk-rated’ approach is being taken and what strategy best suits the client.

He says: “As clients become ever more aware of the risks associated with investment at retirement, many advisers consider funds with specific risk profiles. There are two ways they can do this.

“First, they can target a certain level of risk (a particular percentage of volatility): these are ‘risk-targeted’ funds.

“On the other hand, ‘risk-rated’ funds are simply categorised on the basis of their investment approach as being suitable for investors with certain risk tolerances.

“Some advisers see risk-targeted funds as a way of ensuring ongoing suitability for clients (since the volatility rate is fixed over time), whereas others use risk ratings on funds as a gauge for whether they will fit the client.”

Mr Bateman says whether the fund aims for a specific level of volatility over time is a key question for advisers with clients approaching retirement. Not only does the volatility of a fund impact the potential growth of a pension pot, but Mr Bateman says it also determines the level of income available.

He says: “Multi-asset funds which aim for a specific level of volatility might suit investors looking to strike the balance between preserving their capital, achieving growth and sustaining income for the long term.

“On the other hand, the majority of multi-asset funds tend to aim principally for a specific level of returns, using an approach that seeks to minimise volatility overall.”

Mr Bateman adds it is important to dig into whether the fund has flexibility between asset classes in the shorter term.

The most important thing when considering a multi-asset fund is its risk-adjusted performance, says Meike Bliebenicht, senior product specialist for multi-asset at HSBC Global AM.

That is, she says not viewing the performance of the fund in isolation but also accounting for the risk taken in order to achieve that return.

She says: “Managers extracting the most out of their risk budget - that is, squeezing out as much return as possible for each unit of risk - are what investors should be looking for.

“An attractive Sharpe Ratio relative to other multi-asset funds over the same period would reflect this.”

Mark Wright, fund manager at Seneca Investment Managers, says: “Risk is not only referred to as volatility or potential drawdown in net asset value, but also aspects such as benchmark risk.

“For example, would a client be happy if the multi-asset fund in which they had invested was up 8 per cent in the same year that the UK equity market was up 25 per cent?

“The 8 per cent performance could be perfectly in-line with an objective of achieving inflation plus returns with little volatility, but leave some investors disappointed if they had thought the fund would better keep pace with equity markets.”

Not only is it important to have knowledge of the mechanics of a multi-asset fund, but Mr Wright says it is also beneficial to get to know the individual manager and the ethos of the team supporting them.

He says advisers should aim to see evidence that supports the fact that what is preached is also practised.

It is therefore vital that advisers ask questions of fund managers. He suggests the following:

1) What is the fund’s investment objective?

2) What is your investment universe?

3) What do you consider to be the fund’s benchmark for return comparisons? This could either be an IMA sector or inflation plus target, for example.

4) Does the fund have a strategic asset allocation?

5) What are the fund’s asset allocation ranges?

6) What is your asset allocation process? Are you concerned with only absolute valuations or relative valuations between asset classes?

7) What has been the biggest driver of performance over the last 12 months and five years?

8) What has been your worst investment decision over the last five years?

9) How do you select managers towards whom to allocate capital?

Juliet Schooling Latter, head of research at Chelsea Financial Services, says ultimately advisers should make sure they understand exactly what the client wants to achieve and that they understand what the fund is investing in.

She says advisers must make sure that the particular Multi-asset fund meets their client’s individual needs.

Aside from detailed questioning on process and philosophy, due diligence and risk, David Jane, manager of multi-asset funds at Miton, recommends asking managers the following questions:

1) Do you invest your own money in the fund?

2) Who will manage the fund if you leave?

3) How well do you know your universe, bearing in mind the vast range of asset classes and geographies?

4) What is your definition of risk?

5) In what conditions would you expect the fund to do well/badly?

There are also a range of tools available for researching fund options, including fund ratings agencies and various data providers, says Michael Parsons, head of UK funds sales at JP Morgan Asset Management.

He says advisers can glean information from most fund management groups’ websites, which should have fund fact sheets, portfolio information, details on investment approach and manager philosophy and performance track record.