What's behind fund choice?

In a nutshell, multi-asset investing is a means to get a wide and diversified investment mix across a range of sectors and assets. The underlying investments will include bonds and equities, but should also include a more alternative view with commodities and infrastructure exposure. Spreading the net widely provides a high level of diversification.

To be able to select multi-asset funds for a client portfolio, the adviser must understand the client's objectives and have established their appetite for risk and reward. The route for fund choice is:

• Factfind.
• Understand clients' objectives.
• Establish their attitude to risk.
• Make fund choices.

Each step is dependent on the previous one and helps get a clear strategy in place before making any investment.

With this process agreed, due consideration can be given to the choice of multi-asset funds, which is growing all the time and I would suggest adding to the complexity of fund selection for both growth and income oriented clients. 

A robust investment selection tool or process is essential to be able to cut through the marketing and see the true credentials of funds. Look at the different permutations of what is available.

Something that often gets overlooked when considering multi-asset investing is that some managers might choose to build their fund around carefully selected equities and bonds while others work with a different, but equally valid, approach through the multi-manager model and invest in a range of funds. With the multi-manager approach, some offerings will be fettered and use in-house funds while others will use various investment house funds. During different parts of the economic cycle, many multi-asset managers will use a mix of active and passive tools to manage upside benefits and downside risk.

Investors and their advisers have a wide choice. Table A highlights some examples.

Table A

If we take a moment to look under the bonnet of the Premier Multi Asset Distribution fund we can see what is included under this multi-asset umbrella, Table B shows its six top holdings.

Table B

While the Newton Real Return's breakdown in Table C looks very different.

Table C

The message shown by the holdings breakdowns in tables B and C is that within the multi-asset fund arena in the IMA Mixed Investment sector, the good quality funds are spreading their asset allocation widely and in turn managing the potential risk through this diversification strategy. The two fund breakdowns include such diverse holdings as pharmaceuticals and technology and healthcare and treasury stocks, which is a truly mixed bag. 

Explaining how much risk each type of fund carries is where advisers give real value to their clients. The understanding of risk is essential and, coupled with the asset allocation of a portfolio, goes a long way towards managing the inherent risk within a portfolio. Incorporation of a multi-asset component in a portfolio provides additional risk management through tactical plays alongside the bigger strategic picture.

Each multi-asset fund will or should contain a sufficiently wide range of investments. This is particularly important for diversifying and spreading investment risk when using a multi-asset approach for investors with smaller amounts of capital. One example would be somebody wishing to add to their Isa investment holdings for the tax year and willing to take a level attitude to risk and a medium-term view.

Advisers should have a procedure to go through with their clients to check which fund is suitable. A useful guide is for advisers to look at the IMA sectors Mixed Investment 20-60 per cent and Mixed Investment 40-85 per cent as a starting point, with the 20-60 per cent sector funds offering a potentially lower risk and volatility than the 40-85 per cent funds. Within each of these sectors, due diligence and fund selection criteria must be applied to identify funds that come somewhere near matching the client’s underlying risk profile.

Consider an investor looking for capital growth, who accepts and understands the need to take a wider global view over the medium term. A good example of the Multi-Asset Fund sector is CIS Sustainable World Trust with the sector breakdown shown in Table D.

Table D

Source: FE Trustnet, 31.08.17

This illustrates how the sector breakdown of the fund matches the underlying objective – to deliver long-term capital growth from a wide range of assets spread across the world, with a focus on equities, but including a modest exposure to cash and fixed-interest instruments. 

The use of multi-asset funds within a portfolio also allows the adviser to help an investor access a wide range of investment expertise and fund management skills and in turn work towards potentially achieving their investment objectives. 

The use of a multi-asset approach for retail investors lets advisers provide a route to investment that gives clients fair value; access to a wide range of investment expertise; diversification and clear well-thought-out asset allocation to invest across a spectrum of asset classes and sectors that offer good potential for investment returns. Multi-asset investing is not the Holy Grail, nor is it a one-stop solution for portfolio construction, but it should be considered a key piece in the investment jigsaw. 

Whatever approach an advisor takes working with and advising clients on investments, the fundamental steps highlighted earlier in bullet points remain true. The investment solutions in the marketplace continue to develop and morph in response to factors influencing our world economies. All advisers need to keep an eye on market developments and how this impacts the investment advice they give.

Nick McBreen is an IFA at Worldwide Financial Planning

Key Points

Multi-asset investing is a means to get a wide and diversified investment mix.

A robust investment selection tool or process is essential.

The investment solutions in the marketplace continue to develop and morph in response to change factors.