Multi-asset funds have enjoyed a surge in interest in recent months.
The group represents the second largest Investment Association (IA) sector by funds under management. There is no multi-asset sector per se, but if you consider the IA Flexible Investment, IA Mixed Investment 0-35% Shares, IA Mixed Investment 20-60% Shares, IA Mixed Investment 40-85% Shares, and the IA UK Equity and Bond Income sectors together, the total funds under management amount to £126bn as at the end of February 2017.
In comparison the biggest sector overall – IA UK All Companies – is £167bn, while the next largest group is IA Global at £89.6bn.
Last February saw the IA Mixed Investment 40-85% Shares sector topping the net retail fund sales, after two years of domination by Targeted Absolute Return products. This demonstrates the continued reliance of UK investors on investment professionals to deal with asset allocation through the use of one-stop shop funds.
But the move from absolute return also signals renewed appetite for risk. Indeed, this comes after a decent performance by multi-asset funds, which gained more than 12 per cent in 2016 amid uncertainties in numerous markets. The EU referendum, the US presidential election and interest rate hikes all contributed to market volatility.
Yet global equities have thrived and government and corporate bonds have returned more than 10 per cent. If both risky assets and safe havens flourish in what seems like an unstable environment, it is no wonder that investors are moving away from Libor plus 2 per cent strategies.
Unsurprisingly, the IA Flexible Investment sector was the best-performing multi-asset sector in 2016. With only 11 per cent held in fixed income on average, and a preference for overseas equity over UK shares, it made the most of sterling’s weakness against major currencies and relatively good performance in equity markets.
For instance, the S&P 500 index was up 11.2 per cent in local terms, and 32.7 per cent in sterling terms.
By contrast, with the balance between shares and bonds more even at the start of 2017, the IA UK Equity and Bond Income sector has taken the lead over other multi-asset categories this year.
The interest in multi-asset funds can be expected to persist in the medium and long term. Diversification is key and these products offer a handy solution. They can also be tailored to investors’ needs as many investment managers adapt their view of the world into a range of risk-targeted funds.
Due diligence is essential as fund managers use very different ways to achieve similar objectives.
Should you invest directly in securities or in external managers? Do you want to control cost and go for managers allocating into passives, or do you believe in all-active management?
These are crucial questions advisers need to ask before buying a multi-asset fund.
Amandine Thierree is a portfolio manager at FE
