How to choose the most appropriate fund for clients

The drivers have been both push and pull – the regulator has demanded a greater focus on investor outcomes and suitability, while the active industry has sought to provide options less easily replicated by passive funds.

However, the funds come in a multitude of different guises: multi-manager, income-focused and active asset allocation.

How can advisers select the most appropriate fund for their clients?

As with any fund, the starting point will be the client’s objectives – whether they are looking for income or capital growth, or a combination of both, their time horizon and their risk appetite.

From there, these objectives can be matched to the outcome the multi-asset fund is seeking to provide. With most funds, the capital growth, income or inflation targets and the blend of assets they will be using to achieve them is clear.

Multi-asset funds are mostly housed in the mixed-asset sectors, although they will make use of the flexible sectors where funds do not want to be wedded to certain bond/equity constraints. This is increasingly common for risk-targeted funds, such as the Rathbones range, which sits in the IMA Unclassified sector.

There are other considerations, such as whether an investor wants a directly invested portfolio or a multi-manager fund. The latter may be more expensive, but the higher cost may be offset by the ability to leverage other managers’ expertise.

Gavin Haynes, managing director at Whitechurch Securities, says: “We favour the multi-manager approach, believing no asset manager can be the strongest in each individual equity market, let alone each asset class. However, there is inevitably some double charging.”

With all multi-asset funds, the experience and ability of the lead fund manager and their team will be important.

Richard Romer-Lee, managing director, Square Mile Investment Consulting & Research, says that the environment within which the fund works can also play a crucial role.

“We would expect to see an alignment of interests between the managers and the unit holders in the fund(s),” he said.

“It is no coincidence that the Jupiter Merlin funds – one of the, if not the, most successful multi-manager franchises – are [run] within a business that has many successful and experienced fund managers.

“Similarly, the multi-asset funds managed by Newton, Standard Life Investments and Threadneedle all have access to a great many investment teams and ideas. The Schroders multi-manager team is also thriving.”

Investors will also need to consider the use of more complex instruments within the strategy and whether the team has the resources to manage them.

Although most multi-asset funds stick to the core asset classes of equity, fixed income and property and cash, a new breed of fund is increasingly making use of a variety of more esoteric asset classes.

The trailblazer for this new wave was the Standard Life Investments Global Absolute Return Strategies fund. These funds tend to require deeper resources, such as in-house derivatives expertise, than for a standard multi-asset fund.

For multi-asset funds, the decision is different to picking, say, a standard equity fund.

The aim is not necessarily to find the fund that is going to be the best performer, but the fund that is most appropriate for a client’s needs.

Cherry Reynard is a freelance journalist

Multi-asset in numbers

143: Number of funds listed in the IMA Mixed Investment 20-60% Shares sector

36.46%: Five-year average return from the IMA Mixed Investment 40-85% Shares sector to October 24

46: Number of funds listed in the IMA Mixed Investment 0-35% Shares sector

Expert view

Richard Romer-Lee, managing director, Square Mile Investment Consulting & Research, believes the Investment Management Association (IMA) sectors themselves are not a great starting point for selecting a multi-asset fund.

He explains: “We think the IMA sectors are too broadly drawn, as most of them are based on asset allocation rather than objective or outcome. We don’t think it is appropriate to select a fund on its performance relative to its peer group. It should be assessed relative to its objective. This is particularly relevant when it comes to selecting from the raft of risk-targeted funds now available.”

Choosing a multi-asset fund: what to look for

• Whether the fund has hit its objectives is more important than past performance.

• Sector performance is generally a poor guide to the top-performing funds.

• Where funds use more esoteric asset classes, they need greater resources to analyse them.

• Alignment of interests between the fund manager and investors is important.

• Consider the environment in which a fund manager works and whether they have sufficient support.

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