Putting multi-asset funds in a passive paradigm

Multi-asset funds have become incredibly popular as a method of diversification for investors. The funds live up to their namesake with exposure to equities, bonds, commodities, cash and other alternatives like private equity.

These funds have benefitted from RDR, which forced advisers to rationalise the amount of time they spend on each client; multi-asset funds are easy option to put at the core of portfolios for these time-strained advisers.

The funds’ construction allows for strong returns, like those of traditional equity fund, but it offsets some of the risk with other assets.

Elsewhere, passive investing has also been increasing as a cost effective alternative. This area of the market is benefitting from academic evidence that demonstrates that in the long run actively managed funds to do not perform better than “passive” funds that track an index.

As the passive market has been heating up, providers have been slashing prices in aggressive pricing moves. Fidelity hacked its fees on its passive multi-asset range, the Fidelity Multi Asset Allocator funds, from 0.45 per cent to 0.25 per cent at the end of September.

Passive multi-asset funds

Jason Hollands, managing director at Bestinvest says: “It’s clear that in recent years there has been growing demand from some advisers for multi asset products that deploy solely into passives.

“The attraction here is the low drag impact from costs at a time when investors are perhaps more attuned to the fees they are incurring.”

Ben Thompson, Director of exchange traded funds (ETF) business for Lyxor Asset Management, a subsidiary of Société Générale group, points out passives can drill down into specific growth areas, which offer investors and advisers a luxury of choice.

“You can use ETFs to allocate to specific countries or regions and take advantage of their specificity to focus on more granular opportunities of growth.

“The scope of choice is the beauty of ETFs. You can you use them to build up a very particular multi-asset product.”

But Mr Hollands is not convinced by solely investing in passives and explains it is “certainly no pancea”.

He admits that passive investing is a “sensible” way to invest certain asset classes where the market is difficult to beat, like US large-cap equities, but that isn’t the case with all sectors of the market. For example fixed income does not lend itself to passive investing, according to Mr Hollands.

“Bond investing should be based on an assessment of the yield on offer…but passive investing in bonds leads you to be invested based on the size of the bond issue and the extent to which those bonds are overvalued and trading above their redemption price,” he explains.

Another issue with passive multi-asset investing is it does not hold true to multi-assets’ promise of allowing access to all areas of the market. Passive investing limits your asset allocation as it does not allow access to private equity or operational infrastructure.

However, passive investing is undeniably an area of growth in the market and should not be ignored, Mr Hollands admits.

“The right approach in my view is to be agnostic and use a combination of active and passive instruments.”

Blended funds

One way to get access to this kind of instrument is to opt for a multi-asset blended fund range.

Architas, the specialist investment house within the Axa Group, launched such a range to “address the dilemma faced by many investors in choosing between active and passive investing”. The range consists of six funds managed by senior investment manager Stephen Allen.

The blended funds sit alongside active and passive funds. In 2012 and 2013 the passive funds saw a good deal of flows as cost conscious investors opted for the products, but this year the blended funds have been the most popular, according to Mr Allen.

The fund range hit the milestone of £1bn of combined assets in early October, just over two years from its launch date.

Mr Allen noted that the passive, active and blended funds are all based on a eValue Investment Strategy. The strategy provides a financial forecast, which helps design a portfolio for different risk levels. This strategy constrains Mr Allen’s investment choices.

However, the range still offers allows for decision making. The fund manager makes an active choice as to whether his strategic asset allocation, tactical asset allocation and fund selection is best expressed in an active or a passive tool.

The blended approach is designed to provide a middle ground between a low-cost passive option, which sacrifices the potential for outperformance, or a potentially higher return through active management with higher fees.

This means that despite the influence of a wider pricing war - the group cut the pricing on its fund range from 0.65 per cent to 0.5 per cent and halved the upfront annual management charge from 2 per cent to 1 per cent - they remain more expensive that full passive peers.

This reflects the fact that this is not true “passive” investing as it involves a fund manager making a decision on how and where to invest.

Still the blended approach could offer an alternative opportunity for those who want access the perks of passive, active and multi asset investing. And perhaps it also speaks to the difficulty in marrying up the virtues of a passive approach with the need for active solutions demanded by diversification.

Kathleen Gallagher is a reporter at Investment Adviser

kathleen.gallagher@ft.com