Multi-asset against Multi-manager

He says the recognised major asset classes are equities, fixed interest, property and cash.

In practice, Mr Rutland says it is sensible to break these asset classes down further: equities by geographical location; fixed interest by type (government bonds or corporate bonds) and by quality; property by location and nature (securities or bricks and mortar) and, finally, cash by reference to actual deposits or ‘near cash’ notes.

In addition, Mr Rutland says some clients may seek further diversification from exposure to commodities or commodity funds.

He says: “Most investors will invest in multi-asset by packaged funds of one form or another, whether that is a simple managed fund (a single fund holding different asset classes), a ‘fettered’ fund-of-funds (single fund holding other single asset funds from the same management group) or ‘un-fettered’ fund-of-funds (where a fund manager is at liberty to invest across fund manager from different investment groups).”

Peter Fitzgerald, head of multi-asset retail funds at Aviva Investors, says the assets will generally include equities; large cap and small cap, fixed income; government, investment grade bonds, high yield, emerging market debt and alternatives; and, absolute return strategies, property, commodities or hedge funds.

Francis Ghiloni, director of distribution and client management at Scottish Widows Investment Partnership, says multi-asset investing involves combining assets that provide different levels of risk and return in an optimal mix to achieve a desired level of return at the lowest level of risk.

Ideally, he says these assets should have low correlation to each other in different market conditions.

Mr Ghiloni says: “The aim is to create a portfolio that enhances diversification, reduces risk and smooths returns. A multi-asset fund provides a vehicle to allow investment in this mix of assets.”

Multi-manager is a reference to the fund management team being able to invest across a broad range of funds from other fund management groups or pulling in on the expertise of other fund managers by mandating them to manage assets in their specialist area.

Multi-manager is essentially delegating security selection within different asset classes to specialist managers who will in general work within their own area of specialisation rather than try to manage an overall portfolio.

In many cases, Mr Fitzgerald said there is actually no difference between multi-asset and multi-manager funds.

He said: “Multi-asset describes the approach to portfolio construction, multi-manager deals with how the portfolio is actually implemented or built.

“You could have a multi-asset portfolio which is multi-manager or not and likewise you can have a multi-manager portfolio which invests in multiple asset classes which means it is a multi-asset portfolio.”

Generally speaking, Prudential’s Mr Rutland says multi-manager is a type (or subset) of multi-asset.

That means after choosing to invest across asset classes, a fund manager may choose to also invest using the expertise of specialist fund managers in each asset class, from outside of his own fund management group.

One of the biggest differences between multi-manager and multi-asset is that the latter can use almost any strategy to execute their view on the market, according to Adrian Lowcock, senior investment manager of Bristol-based Hargreaves Lansdown.

He says: “The key factors are they might be able to hold physical gold, or an exchange traded fund that represents physical gold. They might buy individual corporate bonds. They do not have to buy an individual fund to invest in a particular area. Likewise they could buy shares.

“Multi-asset might, at the same time, buy a fund to get exposure to a particular strategy or a particular view. They might hold other funds to reflect their view on cash, for example.”

Multi-manager would, for example, buy a fund like BlackRock Gold and General to get a view on gold than say going to the underlying asset and buying an ETF to do it, Mr Lowcock points out.

He says: “If they have a view on a market they will pick a particular fund manager who reflects that view.

“The key thing is, with multi-asset, you are really getting a more direct execution of the fund manager’s view. If the fund manager has a particular view on gold then they are not buying a particular fund they are buying an investment exposed to gold.

“They can basically buy into different ways that have exposure to gold.

“A multi-manager fund will buy a particular fund that has exposure to gold and a lot of those funds are more into gold equities than the underlying gold commodity.

“You have a more direct execution of a view and that is why multi-asset can be more tactical, more strategic asset allocation. They can take more short-term decisions and movements if they wish.”

Investing in funds managed by a single manager opens the investor to manager-specific risk, warns Swip’s Mr Ghiloni, as there is no guarantee that individual managers can continually outperform at all stages of an economic cycle.

He says multi-manager funds aim to avoid single-manager risk by investing in a range of managers, using different investment strategies.

Mr Ghiloni says multi-manager funds therefore have the potential to offer investors access to a diverse range of investment managers in a single portfolio.

He says: “For multi-manager funds, the focus is not just about investing in the best manager for each asset class.

“It is essential that multi-managers conduct thorough research into the managers and funds in which they are investing and assess how the blend of managers will complement each other and perform in any given prevailing economic or market environment.”

The main focus for multi-asset funds is to provide diversification by investing in different asset classes.

The main focus for multi-managers is to provide diversification by investing in different managers.

Mr Ghiloni says: “Asset allocation and achieving an optimised diversified portfolio is the main focus for multi-asset funds.

“Although this can also be important for diversified multi-manager funds, their main focus is on manager selection. The importance of manager selection has been emphasised during recent periods of market volatility.”