DIY investors face many restrictions

The proliferation of these types of funds is partly a result of the move to outcome-orientated investing, following the pension changes that have placed more emphasis on generating income throughout retirement.

With the availability of so many multi-asset products catering for varying risk appetites and with different track records, are investors better off buying an off-the-shelf product or are there still benefits to be had from constructing their own multi-asset portfolio?

Toby Hayes, portfolio manager of the Franklin Diversified Income fund, notes: “There are lots of components that go into a multi-asset fund and I suppose one major component – which naturally is the biggest driver of returns – is asset allocation and making sure you’ve got global macro calls right.

“Multi-asset as a product is effectively global in nature. All markets are interlinked and you can’t look at them separately.”

For that reason, he believes the ability of the do-it-yourself (DIY) investor to achieve the same thing in a portfolio is restricted.

He says: “To have an in-depth knowledge of global markets in every asset class is hard enough when you have an army of analysts supporting you. My take on it would be that in order to have a coherent global macro view and a coherent multi-asset product that fits that view, is exceptionally hard for an individual investor to do.”

Individual investors may believe that the DIY approach can reduce costs.

Mark Rockliffe, head of intermediary sales at Heartwood Investment Management, suggests: “As an end investor there are loads of perceived benefits of building your own portfolios around the belief that you might be able to cut out some form of cost somewhere.

“But I think the reality is because of the complexity and range of financial instruments and products available, it’s virtually impossible to get to the same level of sophistication in terms of your portfolio.”

He points to the tools and products that are available to multi-asset managers, but that are harder for investors to understand and buy, such as derivative-based products.

Mr Rockliffe acknowledges that costs could fall further with more multi-asset products on the market.

Investors are generally advised when building a portfolio to diversify their investments and ensure that asset classes are not highly correlated. This is perhaps even more sage advice when considering a multi-asset product.

Mr Hayes claims that individual investors are restricted to buying physical assets, such as equities or bonds.

He explains: “I think asset allocation as an approach to building a multi-asset global macro fund is flawed. The reason is that if you have anything more than 15-20 per cent in equities in a fund, your portfolio risk is dominated by equities and therefore the most important call you’ll make is whether equity markets will go up or down.”

He advocates a risk-factor approach to investing, which means taking exposure to the component parts of asset classes and not to the asset class as whole.

“This sort of approach is not available to you if you’re in the DIY mode,” he says.

“You would be in much more of a traditional framework that is trying to blend the asset classes as much as possible. But [this] leaves you open to the fact some of the asset classes could become highly correlated in certain environments.

“So this would be my biggest bugbear about a traditional multi-asset approach and doing it yourself. You could pick up unintended risks that can at times dominate a portfolio and that might not be the most sensible way of doing it.”

One concern of Mr Rockliffe’s is how many managers behind recently launched multi-asset funds have had experience of “running multi-asset money through market turmoil periods”.

He says transparency is vital should an investor opt to invest in a multi-asset fund, as opposed to putting together their own multi-asset portfolio.

He adds: “Client reporting where you’re showing all of the holdings – not just the top 10 on a factsheet – is vitally important because it gives the customer full understanding. It shows them what they can get and what they’re invested in, so they understand where their money is at any one time.”

Ellie Duncan is deputy features editor at Investment Adviser

ADVISER VIEWS

Patrick Connolly, certified financial planner at Chase de Vere, favours traditional multi-asset products:

“For most investors, the best approach is a multi-asset portfolio tailored to their individual needs. However, for those with small portfolios or who don’t know what they’re doing and aren’t taking financial advice, a multi-asset fund could be a suitable alternative.

“This approach isn’t as good as a tailored portfolio, but as long as investors select a fund that is broadly appropriate for their objectives and attitude to risk, they should at least not go too far wrong.”

Martin Bamford, chartered financial planner and managing director at Informed Choice, supports DIY investing:

“I’m a big advocate of investors constructing and maintaining their own multi-asset portfolios, by selecting a range of single asset class funds to populate an agreed asset allocation model. This approach gives the investor much greater control over risk.

“Rather than delegating asset allocation decisions to the fund manager, the investor can determine how much of their portfolio is placed in each asset class. They can also choose the most suitable fund in each asset class to populate the model. It’s important when taking this approach to have the discipline to review your investments each year, rebalancing the portfolio and reallocating profits to the better value assets.

“Following this approach means you need to take an active interest in investing and preferably have access to information about how the different asset classes behave together, and the confidence to select funds.”