Your IndustryOct 23 2013

Pros and cons of multi-asset

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This allows them to create a well-diversified portfolio for a fraction of what it would cost the average investor, says Francis Ghiloni, director of distribution and client management at Scottish Widows Investment Partnership.

He says: “Investing in the right asset classes at the right time is one of the biggest challenges facing investors.

“Asset allocation forms the heart of multi-asset investing. By utilising asset allocation techniques, multi-asset managers adapt to changing market conditions, making tactical changes throughout the different stages of an economic cycle.

“By investing in a multi-asset fund, it is possible to take advantage of market volatility, capturing market upside, while cushioning capital during a market downturn.”

Mr Ghiloni adds that with a well-diversified multi-asset portfolio, it is “unlikely” that returns from each asset will move in exactly the same way.

He says “Therefore, if investors have exposure to a range of assets, it is likely that if the returns from some are falling, the returns from others are stable or rising. The result will be a steadier overall return, with any losses in one asset being compensated for by gains on another.

“The corollary of this diversification is that, while multi-asset funds will capture some of the upside in a market rally, they are likely to be outperformed by a fund investing solely in the asset class that is experiencing a bull run.

“Some will always prefer to make their own decisions on the asset classes in which they invest. But even for these clients, a well-diversified multi-asset or multi-manager fund can prove a very useful core holding on which an adviser or individual can build a portfolio tailored to their specific needs.”

The major advantage of multi-asset is not having all of your eggs in the same basket, according to Paul Rutland, investment business development manager of Prudential.

If we were to chart the attitude to risk of every member of the general population, Mr Rutland says he would expect an even distribution i.e. the vast majority of people will be pretty close to the average attitude to risk with relatively few people being very risk adverse or very risk prone.

Of course, for those risk-taking or risk-avoiding people at the very top or bottom of the “attitude to risk” spectrum, Mr Rutland says some may well be better advised to be entirely invested in “risk-free” assets or, at the other extreme, in equities, usually regarded as the most risky.

For most people – the vast majority on the spectrum – Mr Rutland says blending various risk levels in multi-asset investing should be most appropriate.

He says: “Being invested in multi-asset does mean that a client and adviser will need to keep a very close watch on the asset split – this will change over time based upon the relative performance of equities, fixed interest, property and cash.

“If a client’s attitude to risk has not changed, then a rebalancing exercise will be appropriate.

“Alternatively, of course, one might expect that a multi-asset single fund will have been re-balanced in accordance with its risk rating, but this is something that the adviser should check very carefully.

“Rebalancing should certainly be a feature of a multi-asset fettered fund-of-funds, but again the adviser should look very closely at the options viable and the track record of the fund manager in this regard.”

While running multiple asset client portfolios and rebalancing them from time to time may sound attractive to the adviser, Mr Rutland warns it will introduce two potential problem areas: Regulatory risk and client complications.

Regulatory risk could arise where, for whatever reason, portfolios are not appropriately rebalanced and markets move adversely – or perhaps where client’s attitude to risk has changed and the change has not been picked up as part of a regular review, Mr Rutland warns.

Client complications can arise – depending on the client proposition – where prior consent for switching is needed for fund switching and this is not forthcoming, he adds.

Another potential disadvantage for multi-asset portfolios, according to Mr Rutland, is that they are held directly in authorised investment funds (Oeics and unit trusts) creating a potential capital gains tax (CGT) liability when a client/adviser runs a DIY portfolio.

Mr Rutland says: “Rebalancing funds creates a disposal for CGT purposes, which may give rise to a CGT bill for large portfolios.

“This issue is overcome by single manager funds, fettered fund-of-funds and by multi-manager approaches, where rebalancing is done by the fund manager and does not cause a CGT issue.”

Both the main pro and con of multi-asset is you are really backing the manager’s view and their ability to execute that view and their skill, warns Adrian Lowcock, senior investment manager of Bristol-based Hargreaves Lansdown.

He says the challenge for advisers therefore is picking a good manager in that space.