Time for a clearer definition of multi-asset investing

This article is part of
Multi-Asset - November 2014

Multi-asset investing has become popular in recent years, yet it remains remarkably vague in definition.

This type of investing is clearly not new since balanced portfolios and funds have been around for decades.

Perhaps it was the launch of alternative funds in the mainstream which precipitated the evolution into the multi-asset phenomenon. If so, multi-asset must mean more than just an allocation to bonds and equities.

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Within the fund management industry we may find this a scintillating debate. However, do our underlying investors care? We suspect not. It is the outcome that matters.

While these debates rumble on in the background, we as an industry struggle to help advisers monitor such funds appropriately.

Should multi-asset funds, for example, be measured against the Standard Life Investments Global Absolute Return Strategies, the CF Ruffer Total Return, the Jupiter Merlin Balanced or the M&G Episode funds?

All four are very different in both structure – combinations of multi-manager and direct – and in approach, and they have a mixture of relative and absolute performance targets.

Some are risk-targeted and some place more emphasis on the return. As in life, we seem to always want to put funds into very distinct boxes.

It could be argued that funds should be bunched by investment objectives, not by investment style.

Ultimately, all of these funds are trying to achieve returns for clients using varying levels of risk, but generally less risk than equity markets.

Why not have three sectors: lower, medium and higher risk?

It hardly sounds like a radical solution, but sometimes the simplest solution is the best – it surely beats the dumping ground that is the IMA Unclassified sector.

Lower risk could be volatility up to 7 per cent, medium risk 7 to 11 per cent, and higher risk above 11 per cent across a rolling three-year period.

Yes, volatility is a blunt measure of risk. However, many risk tools in the market do focus on this so it seems like a good place to start.

Certainly, funds could and should be monitored using Sortino and Calmar ratios to identify if capital is placed at risk efficiently. ‘Bear beta’ could be used to monitor a fund’s sensitivity to downside equity markets.

What is key is that quartile rankings, based purely on return, should be discouraged in these sectors.

If a multi-asset fund is targeting inflation, of say 3 per cent, it should be

as unconstrained as possible, thus allowing the manager to use all resources to hand.

The fund might only invest in long-only cash investments, or purely express views using derivatives at the other end of the scale.

It could be 100 per cent active or passive, or all points in between.

The total expense ratio could be 0.5 per cent or 2.20 per cent, so long as the manager can justify it. The possibilities are many.