The asset class pick-and-mix

This article is part of
Multi-Asset Investing - December 2015

With a wide universe of asset classes to pick from, multi-asset fund managers have a difficult task, but plenty are looking far beyond traditional options in search of long-term profits.

These funds can shift between shares, bonds, cash or property to guard against market volatility, alongside other, more esoteric assets. While some are structured as ordinary funds, with different fund managers for each asset, others buy holdings in a range of funds, as part of a fund-of -funds or multi-manager approach.

There doesn’t appear to be a clear definition of what constitutes a multi-asset fund. Patrick Connolly from Chase de Vere says: “For some funds, multi-asset seems to be investing in equities, with a smattering of fixed interest included, for others it is a more even balance of equities, fixed interest and property and for others it will also include other asset classes such as hedge funds, commodities and private equity.”

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Whatever the mix, the number of multi-asset fund launches is anticipated to increase after pension freedoms came into force in April, and their popularity is expected to soar as people choose to stay invested. So what alternative assets are managers picking to spread risk and – were the market to sink – avoid falls?

Eugene Philalithis, portfolio manager of the Fidelity Multi Asset Income fund, with a target income of 4.6 per cent, says: “Traditional income assets such as government bonds, investment grade bonds and cash continue to offer low yields compared to investment grade and high yield credit.”

Talib Sheikh, manager of the JPM Multi Asset Income fund, adds that in the search for returns, he is focusing on areas many investors might find hard to access.

“Yield-focused preference shares are a good example, where our specialists have identified opportunities yielding around 6 per cent. Adding these securities adds to the fund’s diversification,” he suggests.

Managers should be focusing on picking areas to invest in that are uncorrelated to the broader market, stresses Darius McDermott from Chelsea Financial Services. “The best-case scenario is that in times of stress, the diversification of the fund does its job and reduces volatility,” he explains.

In September, Baring Asset Management was one of the most recent to launch a multi-asset income fund, targeting an annual yield of 5 per cent. At most, the fund can invest just under two-thirds of the portfolio in equities. Similarly, it can hold up to 80 per cent in fixed income, 30 per cent in property, a quarter in cash and 30 per cent in alternatives.

Aberdeen Asset Management also launched four multi-asset funds in April targeting retirees who choose to make use of the new pension freedoms.

The funds, which are risk-rated, vary from the cautious (the Aberdeen Multi Asset Conservative fund, rated two) to the Multi Asset Growth 3 fund (the riskiest in the range, rated five).

Funds sit at the riskier end of the multi-asset spectrum if they have little in the way of traditional assets to offer a safety net against market volatility.