Achieving diversification: multi-asset funds, DFMs or DIY

The key conduit for this is some form of multi-asset portfolio, whether a model portfolio provided by a discretionary manager, or a multi-asset or multi-manager fund provided by a fund management house.

The ramped up levels of competition in all these spaces show fund groups clearly believe this is going to be a major driver of inflows for their business in years to come.

Moves by several groups show this, including Pictet’s recent hiring of senior members of Barings’ multi-asset team, Aviva Investors and Invesco Perpetual launching rival products to Standard Life Investments’successful Global Absolute Return Strategies fund, and the broadening of multi-asset/multi-manager ranges by groups such as Old Mutual Global Investors.

But are advisers simply putting their multi-asset eggs in these baskets or are they more involved in fund selection than the prevailing thinking would suggest?

Different strokes

Carl Lamb, managing director at Almary Green, highlights the “significant difficulty” when comparing multi-asset funds to one another given “the management style and remit can vary widely” and that there are “no specific definitions of a multi-asset fund provided by the IMA”.

Multi-asset funds are not only located in the Mixed Investment sectors but also appear in the Targeted Absolute Return, Specialist and Unclassified sectors too.

“Depending on the specific needs of the client we will incorporate multi-asset funds within portfolios,” Mr Lamb explains.

“Multi-asset funds vary widely in their investment make-up and aims and hence we devote significant research and analysis to select the most appropriate solutions for our clients.

“Some multi-asset funds are suited as core holdings within portfolios, while others are better employed to provide exposure to certain asset classes, such as derivatives to provide diversification within an overall portfolio.”

Andrew Alexander, head of investments and product strategy at Three Counties, also devotes time to seeking out what he believes are the best multi-managers.

“I use multi-asset funds because there are some superb managers that only run multi-asset funds and if I discriminated against them, I couldn’t get access to them,” he said.

The adviser highlighted M&G Investments’ Stephen Andrew on the Episode Income fund, City Financial’s Mark Harris and Premier Asset Management’s David Hambidge as managers able to “deliver significant and consistent outperformance”.

Mr Lamb adds as well as using multi-asset or multi-manager funds he himself had researched, he also outsourced some clients to discretionary fund managers.

“While it is important to retain the ability to research and analyse all funds in-house to suit specific clients, it is also clear that in many instances a DFM will have considerably greater resources, which will enable them to provide appropriate investment management and thereby enable the IFA to add value by focussing on financial planning issues,” he said.

Building your own

However, several other advisers who spoke to FTAdviser said they remained happy to select their own single asset funds to create their own multi-asset portfolios.

Devon-based Philip Milton of Philip J Milton & Co, says his business was a “manager of managers ourselves”.

“We believe the opportunity to build a portfolio of diversified assets and considering managers of all ilk, fund and sector is imperative to us,” he says. “There is an extra cost but the benefits far outweigh those in our view and long-term experience.”

Mr Milton says he even offered his investment management services to other advisers so they could access the modelling he uses for his clients.

Alan Dick, certified financial planner at Forty Two Wealth Management, says his system for clients is straightforward.

“All clients, unless they have very specific individual needs, are invested in a model portfolio suitable for their risk profile,” he explains.

“All portfolios contain the same 10 funds in different proportions based on risk profile. All portfolios hold only passive or smart beta funds - one for each asset class.

“There is no need for DFMs or multi-manager funds as we believe in super simple and totally transparent service at the lowest cost possible. We have been doing it this way for more than 10 years now and are happy with the results.”

DFM dilemmas

While Mr Alexander does select multi-asset/multi-manager funds he states he did not use discretionary fund managers.

Something advisers need to consider when using a discretionary fund manager is how the relationship with the client is conducted. If an adviser is outsourcing a client’s investment decisions to a DFM, they will need to add value to the client in other areas, such as tax planning.

Accessing performance data on discretionary portfolios before investing can also be tricky. While Asset Risk Consultants produces indices for discretionary managers to beat, it does not disclose which portfolios outperform and underperform the indices.

Furthermore, research by ARC showed, on average, the difference in returns between the best and worst Steady Growth portfolio within each discretionary management business was approximately 200 basis points.

At most discretionary managers, the differential was between 150 basis points and 250 basis points. However, at one firm, the difference was 400 basis points.

“I believe the use of DFMs dilutes value in our business and increases client cost,” Mr Alexander explains. “We have the resources to do it ourselves.”

Research resources

This is a key point though – adviser firms must have the resources to research all funds should they wish to offer this to clients.

The increased regulatory burden of the RDR means advisers have to show no stone has been left unturned, or if it has, that it was clearly in the client’s interest not to look underneath it.

Mr Lamb says he treats all of his clients as individuals and aims to offer an investment solution which is right for the person in front of him.

It may be that picking a selection of funds is right, or it may be that access to a variety of assets through one fund could be best, he states.

Mr Alexander adds: “It all comes down to resources. The key is do not play at it. Picking funds is a doddle; you set your quant parameters and away you go.

“Creating a portfolio is another game altogether.”

Bradley Gerrard is news editor at Investment Adviser

bradley.gerrard@ft.com