If that’s true, then isn’t a multi-asset fund just a fancy managed fund? As a discretionary fund manager (DFM) has the freedom to pick assets from the entire investable universe, isn’t it a multi-asset fund?
The answer to all these questions is that over the past few years we have indeed seen a blurring of the lines between managed funds, multi-asset funds and DFMs.
So much that we now speak of a convergence of investment styles between them.
A quick rule is to think of traditional and alternative assets.
Years ago, managed funds were the default investment option for many contracts on which clients were advised. That was because it was the easiest option – providing diversification and active management, to allow weighting towards the better performing assets. Unfortunately, there was very little difference, or variation, in performance within the peer group.
Everybody was invested in the same assets. As the managed fund option has been replaced by multi-asset funds and DFMs, advisers now need to understand the differences between these options.
Managed funds typically consisted of equities, bonds, cash and some commercial property, what we regard as traditional assets. They followed a strategic asset allocation, based on long-term, forward-looking economic data.
Occasionally, as and when events in the market dictated it, managed funds increased or decreased their allocation in one area or another. Managed funds were return focused, tracking or looking to slightly outperform a benchmark.
DFMs, meanwhile, were typically expected to have a 60:40 asset split between equities and bonds, with some overseas equities to increase risk in the portfolio and some dividend stocks for an income slant. Again, their focus used to always be on traditional assets, and the investment style was more absolute return.
Multi-asset funds, in contrast, were created using more complex strategies – borrowed in part from the hedge fund and institutional worlds. The specific feature of multi-asset funds was their depth of asset classes, including more alternatives.
With a multi-asset fund, you expected to get exposure to many sub-categories underneath the top level categories.
Our analysis shows that the market is now converging. When it comes to funds that invest in a broad spread of different assets, we see more and more portfolio managers investing in a whole range of traditional and alternative assets in a way that reflects a specific mandate.
This is irrespective of the type of institution the investment manager works for or the product wrapper they use.
What can a modern ‘convergent’ portfolio look like?
These portfolios use all the traditional asset classes such as equities, fixed interest securities and cash, but they break them down to even more granular layers. For example, equities may be classed not only by their market capitalisation but also by their global industry sectors: fixed interest securities are overlaid by currency, duration and synthetic structures.
Meanwhile, modern portfolios also take advantage of many more alternative strategies. With so many different building blocks available to investment managers, we should not see the close relative performances of the old managed funds.