DIY investors face many restrictions

This article is part of
Multi-asset investing - May 2015

With the wide range of multi-asset funds that have been launched in recent years, investors now have more choice than ever if they want to add a multi-asset product to their portfolios.

The proliferation of these types of funds is partly a result of the move to outcome-orientated investing, following the pension changes that have placed more emphasis on generating income throughout retirement.

With the availability of so many multi-asset products catering for varying risk appetites and with different track records, are investors better off buying an off-the-shelf product or are there still benefits to be had from constructing their own multi-asset portfolio?

Article continues after advert

Toby Hayes, portfolio manager of the Franklin Diversified Income fund, notes: “There are lots of components that go into a multi-asset fund and I suppose one major component – which naturally is the biggest driver of returns – is asset allocation and making sure you’ve got global macro calls right.

“Multi-asset as a product is effectively global in nature. All markets are interlinked and you can’t look at them separately.”

For that reason, he believes the ability of the do-it-yourself (DIY) investor to achieve the same thing in a portfolio is restricted.

He says: “To have an in-depth knowledge of global markets in every asset class is hard enough when you have an army of analysts supporting you. My take on it would be that in order to have a coherent global macro view and a coherent multi-asset product that fits that view, is exceptionally hard for an individual investor to do.”

Individual investors may believe that the DIY approach can reduce costs.

Mark Rockliffe, head of intermediary sales at Heartwood Investment Management, suggests: “As an end investor there are loads of perceived benefits of building your own portfolios around the belief that you might be able to cut out some form of cost somewhere.

“But I think the reality is because of the complexity and range of financial instruments and products available, it’s virtually impossible to get to the same level of sophistication in terms of your portfolio.”

He points to the tools and products that are available to multi-asset managers, but that are harder for investors to understand and buy, such as derivative-based products.

Mr Rockliffe acknowledges that costs could fall further with more multi-asset products on the market.

Investors are generally advised when building a portfolio to diversify their investments and ensure that asset classes are not highly correlated. This is perhaps even more sage advice when considering a multi-asset product.

Mr Hayes claims that individual investors are restricted to buying physical assets, such as equities or bonds.

He explains: “I think asset allocation as an approach to building a multi-asset global macro fund is flawed. The reason is that if you have anything more than 15-20 per cent in equities in a fund, your portfolio risk is dominated by equities and therefore the most important call you’ll make is whether equity markets will go up or down.”