Multi-asset funds: Multiple definitions

Currently, there are no set guidelines from either the IMA or Morningstar as to what constitutes a multi-asset fund. This means there is no definition as to what a multi-asset fund truly consists of, so as long as a manager holds more than purely equities or purely bonds, it can theoretically be classified as multi-asset.

In January 2012, the Investment Management Association (IMA) renamed its managed sectors after an eight-month consultation process to specify the set percentages of equities a manager in each is allowed to own.

However, there are still the mixed asset sectors – the Mixed Investment 0-35 per cent Shares, 20-60 per cent Shares and 40-85 per cent Shares sectors which can only invest the respective amount into equities, and the Flexible Investment sector in which a manager can invest up to 100 per cent equities should they wish.

Crying out

However, there is little flexibility within the sectors. David Coombs, head of multi-asset investing at Rathbone Unit Trust Management, says there is an “absolute need” for a multi-asset sector and says the space is “crying out” for it.

“There are the mixed sectors but they are too straitjacketed for us. And that is the problem. Every time we look at our funds and sectors, we find we would have breached one of the upper or lower limits,” he says. Mr Coombs’ funds sit in the Unclassified sector, where he says there is more flexibility in terms of asset allocation than other sectors. “I think that is what clients want. They want you to back your conviction, not to be constrained. But the Unclassified sector is a real mixture and a bit of a mess.”

He says a multi-asset sector will give more clarity. He says without a specific sector, different groups have different ideas on who they think are their competitors without a specific sector. “When trying to focus on how our peers are performing, it is difficult because they straddle different sectors. It would also be handy for IFAs although we find some advisers will not buy anything in the Unclassified sector – which is not good news for us,” he adds. “A bit more certainty would be very helpful.”

He points to funds such as the £17bn Standard Life Investments Global Absolute Return Strategies, £2bn CF Ruffer Total Return and £2bn Troy Trojan funds which are all multi-asset funds but “lost and hidden in other sectors”. Mr Coombs adds there are a lot of funds, particularly newer launches, which are targeting risk and no longer fit into any sector.

For Scott Jamieson, head of multi-asset at Kames Capital, a fund that can hold more than 85 per cent in one asset is “not multi-asset”. “Something like that is an equity fund which has taken some off-benchmark equity risk,” he says. A multi-asset fund should be something that has the freedom to fully exploit the financial market, he adds, not just allocating to one asset class with a “bit of icing on top”.

Mr Jamieson says to be effective in the multi-asset space, it is important to operate to the best of your ability in all available asset classes without bias. In terms of general asset allocation strategy, a multi-asset manager needs to be equally comfortable in different asset classes. “If you have a strong bias to a certain asset class then, inevitably, market cycles will begin to challenge your bias and you will eventually lose,” he says. It is important to continue to manage funds without a favourite and instead look at asset classes based on their merit rather than preference, he adds. “It might seem obvious, but it is astonishing how often that is not the case.”

How do they work?

Mark Parry, senior portfolio manager for the Aberdeen Multi-Asset fund, says his team recognises there are different relationships between different assets and asset classes that can be exploited to create a multi-asset fund.

“In the fund we have a range of strategies and we do not use cash. It is not something we strategically use a lot of because so long as there remains a negative correlation between bonds and equities it will be that combination that will give you a better pattern of risk and return,” he says.

The manager adds the fund also invests in the alternative space, including infrastructure, funds of hedge funds and commodities. He says ultimately the fund aims to deliver growth for investors. “Finding it is relatively easy, but what is not easy is managing the risks that come with a multi-asset structure. For us, it is focusing on an outcome and deciding what combination of risk and return we can produce,” he adds.

Deciding on which strategy to take depends on market environments. Mr Parry says if the market is pro-growth, the fund may take a relative overweight position in equities, but there is also the flexibility to instead have exposure to Asian local currency fixed income, or high yield.

“It is not just down to the simple fact that if we are looking for growth we take up equities, if not, we take up bonds. It is identifying a macroeconomic theme and seeing how you can best capture that using the multiple assets available to us,” he adds.

Skinning the investment cat

David Hambidge, head of multi-asset at Premier Asset Management, manages the group’s multi-asset funds in a slightly different way. He describes the management style as multi-asset but also multi-manager. Instead of buying assets, he buys open- and closed-ended funds to blend instead of stockpicking individual equities, bonds or physical gold. He says he considers four “buckets” of assets: equities, bonds, commercial property and alternative assets. Alternatives include infrastructure, which he has had a position in for the past four years, as well as real estate debt which he has been invested in over the past nine months.

“We are looking for assets that typically have a low or negative correlation with the bulk of the portfolios,” he says. “You want to have a few assets in the portfolio that have really low or negative correlation to mainstream assets like equities and bonds.”

The team has six different portfolios, ranging from cautious to balanced to the more adventurous funds. Mr Hambidge says, “The nice thing about running a multi-asset fund is that no two are the same. Our funds all have some similarities, but all multi-asset funds are different. There are lots of ways of skinning the investment cat.”

Allocation

Chart 1, Chart 2, Chart 3 and Chart 4 prove Mr Hambidge’s point. The Charts show the asset allocation for the £6.5m Rathbone Enhanced Growth portfolio, £257.2m Kames Inflation Linked fund, £96.7m Premier Multi-Asset Income & Growth fund and the £700.8m Aberdeen Multi-Asset fund, all according to Morningstar data.

What is immediately clear is the sheer difference in asset allocation between funds that all brand themselves multi-asset. For instance, in the Rathbone Multi-Asset Enhanced Growth fund, more than 65 per cent of the fund sits in equities. Mr Coombs says the fund does not look very multi-asset, but in the other funds within the multi-asset portfolio, there are different levels of equity exposure all depending on the market environment.

As the name suggests, the Kames Inflation Linked fund has its highest exposure, 54.3 per cent, in the UK inflation-index, closely followed by 54 per cent in global fixed income. This allocation is balanced by a short position in UK cash, shown as negative in the Chart.

The fund has a more fixed income bias currently compared to the Rathbone fund. It sits in the IMA Mixed 0-35 per cent Shares sector, which allows the fund to have up to 35 per cent allocated to equities.

Chart 3 shows the Premier Multi-Asset Income and Growth fund, which sits in the IMA Mixed Investment 40-85 per cent Shares sector. It has no clear bias in the fund, with the highest asset allocation attributed to ‘unclassified’ assets.

The Aberdeen Multi-Asset fund has the most assets as described by Morningstar. Of 15 asset classes, the highest is in UK equity large-cap stocks at 25.2 per cent. The fund sits in the same sector as the Premier fund, and both have the highest amount of asset classes within the funds. As with Chart 2, Chart 4 shows short positions as negative.

Big role

Multi-asset funds theoretically play a big role in the investment world due to the ability the funds have to switch between asset classes in turbulent markets. However, choosing a multi-asset fund can be somewhat confusing for an investor, particularly as Rathbone’s Mr Coombs points out there are funds without the term ‘multi-asset’ in their name and which are disguised as other strategies.

How this will be resolved remains unknown, although there is growing demand from managers and some advisers for a more defined term to lessen the confusion and make it easier to compare different multi-asset funds.