Multi-asset funds adopt a strategic asset allocation framework with pre-defined ranges across a range of asset classes.
A multi-asset fund has the ability to invest across a range of asset classes such as equities, bonds, commodities, property, cash and a range of alternatives, rather than being focused on just one or two asset classes.
However, given that ostensibly single asset class funds will typically invest in more that one asset class, even if this just means holding a portion of invested monies as cash, settling on a strict definition of ‘mutli-asset’ can be difficult. It was once considered a rule of thumb that a fund should invest in at least five asset classes, but there is no consensus on such a definition.
Funds of this ilk are typically classified by the amount they are allowed to hold in equities in a bid to give an indication of the risk involved, says Juliet Schooling Latter, head of research at Chelsea Financial Services.
The standard segmentation is set according to the Investment Management Association’s ‘mixed investment sectors, which were created following a revamp of its more nebulous ‘managed’ sector titles and delineate funds by whether they hold 0 to 35 per cent shares, 20 to 60 per cent shares, 40 to 85 per cent shares, or are completely flexible.
The degree of cross-over between sectors, and the fact that funds that are not ‘true’ multi-asset funds can meet many of these definitions, has led to calls for a specific multi-asset sector to be launched.
What multi-asset funds aim to do
Generally, David Jane, manager of multi-asset funds at Miton, says investors are not exposed to the market gains or losses of a single asset class with a multi-asset fund.
He says: “Not only do multi-asset funds invest across a diverse range of asset classes they can also invest across a range of geographical areas too.
“They look to combine these assets, with varying levels of risk and return, in order to meet the fund’s objective. Multi-asset funds are usually associated with trying to produce consistent performance with lower levels of risk and volatility than single asset class investments.”
Mark Wright, manager at Seneca Investment Managers, agrees that the basic concept of multi-asset funds is by investing across multiple asset classes these funds can deliver a ‘targeted’ return with lower levels of volatility.
Mr Wright says multi-asset funds will normally invest in equities, fixed interest, alternative assets and cash.
Digging a little deeper into an individual fund’s asset mix will reveal a heterogeneous concoction of investible assets however, which Mr Wright says can include anything from frontier market equities to emerging market inflation-linked bonds and insurance-linked strategies.
In some cases, especially where funds operate within a multi-manager ‘best ideas’ framework, very esoteric assets such as rates futures across a wide variety of geographic areas, volatility derivatives and much more besides might be in the portfolio.
Mr Wright says: “The large array of investible asset classes means that asset allocations can be tailored in order to try and achieve a specific return objective over an investment cycle, for a pre-determined level of risk.
“Some funds are relatively aggressive and essentially target equity-like returns, but with much lower levels of volatility. These are often referred to as ‘diversified growth’ funds.
“In contrast, others are managed for those investors whom are more cautiously minded and for example, may aim to deliver real returns (i.e. ahead of inflation) but with minimal drawdowns in net asset value.
“Some multi-asset funds prioritise generating a high level of sustainable income instead. Multi-asset funds are not only differentiated by their return objectives and underlying investments, but also by the way in which they invest in those assets.”
Craig Nowrie, multi-asset client portfolio manager of Threadneedle Investments, says he sees the additional governance that is employed within multi-asset funds as a major advantage for investors.
Having a fund manager continually reviewing the market, the underlying asset classes, valuations, opportunities and threats and dynamically allocating the portfolio as the opportunities and threats present themselves is a significant benefit, he says.
But he admits ‘regret risk’ is a potential consideration with multi-asset funds.
He says: “Additionally, managers will sometimes invest in the wrong asset class, though by diversifying one would anticipate that the overall return should be helped by other assets performing better.
“There are important leverage and liquidity aspects. Some multi-asset managers make meaningful use of leverage or employ niche, esoteric and illiquid asset classes.
“Leverage and liquidity are clearly risks that will not suit all investors. However some will see this as a way of gaining exposure to certain asset classes.
“A manager that invests in niche asset classes, for example, may have an appealing story explaining why they invested in the asset, but can they invest as the fund grows to £1bn, £5bn and above? These aspects need to be considered when reviewing and ultimately selecting a manager.
Cost is also definitely a factor for advisers to consider, Mr Nowrie says.
He says costs of multi-asset funds are generally comparable to equity funds and are typically cheaper than many alternative investments such as hedge funds and private equity funds.
