Multi-asset funds have been receiving a lot of attention of late. Criticised for misleading investors for the amount of risk the funds involved, the fund management industry has been forced to reclassify them.
But it has not been an easy path. Initial recommendations from the IMA were strongly criticised, but in November last year an agreement was reached.
The sector classifications for the make-up of the funds have changed to reflect simply the share constituent. As of the end of April, fund managers will no longer call their funds ‘cautious’, ‘balanced’ and ‘active’ managed, but instead ‘mixed investment’, with the constituent of shares varying between 0 per cent to 35 per cent, 20 per cent to 60 per cent, 40 per cent to 85 per cent shares and ‘flexible investment’.
Fund managers are currently making their changes, which varies from provider to provider.
Fidelity, for example, is finding that some of its funds that are benchmarked to their peers will now have a different benchmark, because the peers will be changing themselves. This could have a subsequent impact on the performance of the funds themselves.
Stephen Edgley, investment director of the investment solutions group of Fidelity, said: “Cautious Managed sits across two new sectors - 0 per cent to 35 per cent and 20 per cent to 60 per cent equities. Our funds are going to have to decide which sector to go into.
“Our competitors are doing the same thing. The averages are now changing and the group of funds which we are benchmarked against will change. Some will go in one sector and some another.”
The move will affect three of Fidelity’s multi-manager funds and a small number of retail funds. Apart from resetting the benchmarks, Fidelity will have to make changes to the fund prospectus and other documentation, but Mr Edgely believes it will be finished in time.
He said: “It will have an effect on performance comparison for funds.”
The multi-asset industry has had other issues on its agenda. The biggest issue to hit financial advisers is the RDR, and fund managers are hoping that advisers will resort to multi-asset funds more, as they look to rationalise their time and outsource investment decisions.
Phil Reid, head of UK retail distribution of HSBC Global Asset Management, said he has seen a big spike in demand in recent months.
He said: “The increased pressure of making investment decisions will mean that some IFAs don’t want to specialise in that area, they will outsource some of the major building blocks to a provider, and add value on the planning side.”
Mr Edgley agrees. He said: “It is already pertinent to the RDR, we’re seeing the first signs. Everybody is looking at how they can simplify and be more efficient with their time and costs and making sure they’re delivering the right solution for their clients, and multi-asset sits at the heart of the problem.”
Property
However, not all financial advisers agree. Danny Cox, head of advice at Hargreaves Lansdown, does not especially like multi-asset funds as they often include assets he is not particularly keen on.
These funds can vary from a straightforward mixture of fixed interest and equities, with a varying proportion of each, to hedge funds, commodities, ETFs and property. It is this last bit that puts Mr Cox off.
He said: “We’ve been bearish on property for years, even when it was booming. At the moment we don’t like it.
“We think it’s going to go down before it goes up.
“The real downside is that investors get locked in - even some of the bigger funds which have lots of liquidity. When it came to the credit crunch they had to set up a redemption period for eight or nine months and investors don’t like being locked in.”
Mr Cox said that at his firm, advisers preferred to use multi-manager funds, or alternatively to go to the specific fund manager and build up a portfolio that way, rather than outsource it. He said: “We prefer to go for a portfolio, for example fixed interest.” He added that if the client wanted equity exposure then he preferred to go to the fund manager specifically running an equity fund, as that manager would be a specialist, rather than wrap it all up into one, mixed asset fund.
The exception, he said is when the sums involved from the client are small. Mr Cox said: “When we’ve got much less going in, it’s better, or we might take a strategic approach.”
Strategic funds, which invest in the more appealing fixed income and equities, are more appropriate, Mr Cox said, because they have a longer time horizon, and a more attractive approach. He said: “Strategic asset funds tend to have as many small positive returns every day as they can.”
But his attitude does not stop the investment industry from evolving. Fidelity has been bringing in new asset classes into its multi-asset funds, to include commodities and hedge funds.
Mr Edgley said: “They provide you with a wider scope for building diversification into your portfolio. The more asset classes you have, the greater the opportunity you have to build a portfolio.
“The other advantage is these new asset classes bring in an opportunity generating alpha, if you find a manager who can provide additional return into your portfolio as well.
“It doesn’t bring additional risk, it brings you the opportunity to reduce risk. When you operate in the hedge fund space, you need to know what you’re looking for. You have to be very careful how you do your due diligence, and bring a bit more to the table.
“I think it’s a space that a lot of people are looking to provide solutions to the challenges of the RDR.”
Other areas that fund managers are looking at is the area of passive investing. This approach has become more popular as stock markets have failed to deliver stellar returns, and investors question why they should be paying expensive fund management charges, when the returns do not justify the costs.
HSBC, for example, launched last year its World Index Portfolios, to take advantage of this developing sentiment.
The funds invest in a range of passive funds and index trackers, as well as ETFs, but are actively chosen. Mr Reid said: “Investors are in beta solutions and ETFs. Our expertise is asset allocation and we invest in underlying passive funds.
“People are saying ‘I am paying for this manager, am I really getting the alpha?’ There will always be demand for active managers but people are more conscious about what they’re getting with active fund management. As a result where managers haven’t performed, for this part of the market, they’re going to allocate to a passive fund.”
He added that most people will have some passive funds. “The reason we built the World Index is that passive is going to be a growth area, it will form a larger part of people’s portfolio.”
However, he added that clearly it was not HSBC’s job to say which way the client should go, but instead offer the options to the adviser, and allow him to make the relevant recommendations. “All we need to do is provide the relevant product in the key areas. We believe the IFA has the relationship to the end user.”
Obviously in some instances, recommending a client to be in an emerging market fund would be a good idea, in others not, but it would be up to the IFA and client to agree that, he said.
Overall, multi-asset funds have become popular in recent years, as they offer a solution, especially for clients with a small amount to invest, an off-the-peg way of diversifying their assets. But debate exists as to whether they are suitable for everyone, and if indeed they have drawbacks. Nonetheless, as advisers face up to the challenge of the RDR, they could offer one way for IFAs to look after their low and middle income investors.
Melanie Tringham is features editor of Financial Adviser
