Multi-asset  

A quandary for IFAs

The sheer time, effort and energy required to select, purchase, rebalance, monitor and review a series of investment vehicles or funds for each individual customer would be massively time consuming and not cost-effective for the investor or the adviser.

Multi-asset approaches – fund of funds, manager of managers or model portfolios – are compelling solutions as the offer many benefits, including:

•Diversified asset mix

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•Rebalancing

•Economies of scale

•Range of investment styles

•Range of managers (potentially)

The initial products available in the market were fairly simple fund of fund solutions, either offered by one manager into their own underlying funds (fettered) or by selecting managers from the wider marketplace. Typically they held equities, bonds and sometimes property. The old Investment Management Association sectors of cautions, balanced and active grew in popularity and were complemented by new ideas such as single-sector fund of funds, niche managers and distribution products.

Most of these early funds were active managers putting together portfolios of active funds – this created one potential weakness of the fund of fund structure – namely cost. With two sets of managers (with their annual management charges) and two sets of dealing costs, this apparently simple product could be quite expensive with total expense ratios upwards of 2.5 per cent a year.

With the growth of passive funds, and exchange-traded funds particularly, we have seen these costs come down as managers are able to allocate to asset classes on a more cost-effective basis – running what are, in essence, core and satellite approaches. We have also seen the arrival of the first completely passive fund of funds with aggregate TERs below 1 per cent a year.

Manager of managers products have not been as popular as fund of funds. Perhaps this is due to their perceived ‘institutional’ nature, though RDR and new innovations may see this approach grow in popularity.

The introduction of Ucits IV legislation has allowed managers to use derivatives for the first time. This adds a layer of sophistication to the simple product idea. Combine this with the inclusion of synthetic ETFs inside fund of funds and you can see that this once-simple multi-asset solution has become a more complex animal.

There are many approaches that fund of fund and other multi-asset products can adopt. Some managers adopt long-term strategic asset allocation positions and only make occasional tilts away for this benchmark. Others are more aggressive at the tactical level and may take substantial positions away for the fund benchmark asset allocation.

A growing number of managers are using some external source of asset allocation for their benchmark – either from a risk tool or using some form of volatility measure to construct dynamic asset allocation. Understanding how these benchmarks are constructed, particularly the underlying assumptions, is an important part of any due diligence process for the adviser.

Many funds now have a risk rating of one form or another – again it is important to understand this. Is it, for example, a snapshot risk profile taken on some historic date, or is it a risk rating that is adhered to over time, that is, risk managed?