Legal & General Investment Management launched its Multi-index range of risk-targeted funds in August 2013.
The aim of each product is to generate capital growth and income and to keep the portfolio within a predetermined risk profile while investing across the asset classes. The £192m Multi-index 5 fund sits firmly in the middle of the range, which targets risk profiles from three through to seven and is positioned at level four on a risk-reward scale. Ongoing charges are 0.31 per cent on the I share class, which is the clean free retail share class.
Manager Justin Onuekwusi says the range is built on “four pillars of multi-asset investing”, the first of which is suitability. He explains: “Advisers have told us they need to ensure multi-asset funds not only have initial suitability, but also ongoing suitability. This means risk-targeted [funds] for us.”
The second pillar is based on cost-effectiveness, which is not simply a response to the RDR. “Advisers are starting to realise that costs can impact outcomes – the higher the costs, the more they detract from the overall outcomes,” he says. “The third point advisers wanted was active asset allocation. The realisation of the importance of asset allocation has really come to the fore now the investment community is focused on outcomes, and it’s clear it is a key driver of risk and therefore returns in a multi-asset portfolio.”
The fourth pillar is simplicity. The manager notes: “Advisers say [if] you make a fund complex and full of derivatives, [then it will] only be a small part of our clients’ portfolios. To be a core part you have to be simple, understandable and transparent.”
He believes it is important not to “blindly follow” a risk profile – which tends to be a backwards-looking measure of risk – and this has been avoided in the fund range by building a portfolio that looks ahead to the next five to 10 years. “We then ask [if] there are any risks or opportunities we haven’t taken into account in the long-term asset allocation over the next one to five years. We don’t use these allocations and say we’re going to go overweight this or underweight that, we build our own from the bottom up.”
A recent change to the range has been a result of identifying emerging markets “winners and losers”. Mr Onuekwusi notes: “We can no longer say that we’re going to invest blindly in emerging markets from a medium-term perspective. We think the driver of performance from the winners is India, so we buy emerging market exposure towards Indian equities. Although the reforms that [prime minister Narendra] Modi is looking to implement haven’t gone as quickly as we wanted, there is real intent there to drive through structural reforms.”
It is still early days for the fund range but in the year to October 23 the Multi-index 5 fund delivered 7.1 per cent, versus the 5.4 per cent return from the UK Risk-targeted Multi-asset Risk Band 3 sector. Mr Onuekwusi acknowledges that looking at the performance for a multi-asset portfolio can be difficult as there are a number of comparisons advisers can make, including with the risk-targeted peer group and other fund houses with a bias to index portfolios.
The vehicle’s allocation to direct property has contributed to its outperformance. The manager explains: “We’re seeing an increase in transactions both inside and outside of London, and we felt the property recovery was widespread and not concentrated in any particular part of the market or geography. That has come to fruition probably better than we expected. Since inception, direct property has been the strongest performer of all the asset classes in our portfolio.
“The second is US equities. We believe in having a diversified portfolio, and therefore the allocation to US equities tends to be higher in Multi-index than in other risk-targeted funds and that’s benefited the portfolio over time.”
He adds: “One of the things that has detracted is that we were long duration [interest rate risk]. We’ve had a structural bias to be underweight duration and that hasn’t really helped, particularly within gilts, which have been a really strong performer. But to mitigate this we have been quite diversified and that has helped on the downside.”
EXPERT VIEW
Darius McDermott, managing director, Chelsea Financial Services
This fund is in the middle of a range of five risk-targeted products. It may lag in strong markets as its risk profile dictates it won’t be as punchy as some of its peers in the IA Mixed Investment 40-85% Shares sector. It is cheap as it mainly invests in L&G’s index funds. The fact that it’s fettered doesn’t matter too much as the focus is on getting the asset allocation right rather than choosing the best funds. So far so good – the fund has only been around for a couple of years and the team, while very experienced, has not been together long, but its decisions have been good. Volatility is currently below the target range set.
