How to use multi-asset funds at different life stages

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Supported by
Aviva Investors
How to use multi-asset funds at different life stages

In this way, multi-asset has come to be suitable for advisers with clients who are just starting out investing their money, all the way through to those who are about to retire and want to fund their later years.

While multi-asset solutions will certainly not be the right answer for all an advisers’ clients, they can suit people with a variety of needs and investment goals.

In fact, establishing these goals and how the client wants to achieve them is a crucial first step in the adviser/client relationship, as is understanding the level of risk a client is willing to take to get their desired returns.

Determining risk

Jason Dewar, head of funds research at Distribution Technology, says: “A customer’s risk profile report is important for a number of reasons. Initially it will determine if the customer is willing and able to take any risk at all. 

“Assuming that the customer can accept losses it will then illustrate the possible range of outcomes for a given level of risk. At this point the customer and adviser can discuss whether this is acceptable, or whether the customer needs to consider other options in order to meet their investment goals.”

Once the level of risk has been agreed, the adviser can suggest investment funds that match the risk profile.Jason Dewar

He suggests this could include investing a higher amount, accepting a longer investment term or even a higher level of risk.

“Once the level of risk has been agreed, the adviser can suggest investment funds that match the risk profile. This could be a single risk profiled or risk targeted multi-asset fund or a portfolio of single asset funds,” he concludes.

The backdrop against which a client is investing may also play on their minds when it comes to selecting the right multi-asset fund for their portfolio.

Royal London Asset Management (Rlam) surveyed 101 wholesale and institutional clients at its annual investment conference, revealing politics and political risk is top of their investment concerns in 2017, while 26 per cent cited rising inflation and interest rates as the biggest threat to investors.

In terms of the asset classes clients are likely to favour over the next 12 months based on those potential threats, 58 per cent of those surveyed selected equities, while a further 16 per cent chose commodities. 

Nearly one in five cited cash and absolute return strategies as their favoured asset class.

Far and wide

For those clients dipping their toes into investing for the first time, picking a single asset class in which to invest a chunk of their hard earned savings can be tricky.

Of course, any good financial adviser will help their clients make these types of decisions.

But by investing across a range of asset classes, first-time investors can spread the level of risk they are willing to take while they familiarise themselves with the vagaries of the stockmarkets.

“A multi-asset fund solution can work well for people starting out, via a savings plan, who just want access to the skill of the manager without all of the hassle of selecting numerous investments,” points out Craig Wright, managing director at Tilney for Professionals.

Buying one fund which invests in several different asset classes and allocates globally ensures exposure is diversified and helps to keep costs down.

Matthew Phillips, managing director at Thomas Miller Investment, insists multi-asset products can be suitable for all stages of life as diversification is “vitally important” at any age.

In the modern world, individuals increasingly want greater flexibility, they want to continue working but not necessarily in the same role or with the same commitments to their career.Matthew Phillips

“However, we would argue that in the accumulation stage individuals should be taking more risk,” he reasons. 

“They need to accumulate lump sum amounts and they have the time to invest. Once one moves into the decumulation phase, this should not necessarily be seen as a cliff edge where the behaviour in the accumulation phase is turned on its head. 

“In the modern world, individuals increasingly want greater flexibility, they want to continue working but not necessarily in the same role or with the same commitments to their career.”

He argues in some instances advisers’ clients in the decumulation phase may need to supplement income with the retirement savings rather than replace, and confirms “they can continue to accumulate and take some risk, if not at the same level as when they were fully in the accumulation stage”.

“Moving to a lower risk portfolio that still has growth elements is likely to be appropriate and suitable, especially if the natural income stream increases,” Mr Phillips notes.

This is one of the reasons multi-asset income funds have become a popular choice for investors with income requirements.

Income needs

In the same poll by Rlam, when asked about the best opportunity for income right now, 24 per cent of clients picked multi-asset income, closely followed by equity income (22 per cent).

Eugene Philalithis, portfolio manager of the Fidelity Multi Asset Income Fund, believes these types of funds are not simply designed for those seeking yield in retirement though.

"While these are often seen as a product for the retired, I think they also offer a valuable option for young people starting to save who are nervous about investing for the first time," he says of multi-asset income funds. 

"They offer a relatively conservative way to save while benefiting from the compounding power of income."

Another type of multi-asset fund which has launched in response to the changing needs of retail investors has been risk-targeted ranges.

The main attraction of risk-targeted funds is that risk is managed within a pre-defined risk tolerance, providing investors with greater certainty about the range of returns in their portfolios.Francis Chua

Francis Chua, assistant fund manager at Legal and General Investment Management observes in the retail world, RDR contributed to the growth of risk-targeted funds.

Mr Chua explains: “The main attraction of risk-targeted funds is that risk is managed within a pre-defined risk tolerance, providing investors with greater certainty about the range of returns in their portfolios. 

“This makes risk-targeted funds popular with IFAs, who can construct portfolios tailored to their clients’ risk appetites.”

But he acknowledges: “While the structure of risk-targeted funds meets the needs of advisers, and while it remains of utmost importance to maintain ongoing suitability, as with all other types of strategies within risk-targeted funds there will be winners and losers. 

“In this sense, these funds have yet to be truly tested and only after we see greater volatility in asset classes and significant pullback in equity markets will we know which funds can stand the test of time.”

For example, Altaf Kassam, EMEA head of strategy and research, investment solutions group at State Street Global Advisors, says its three multi-asset funds for the Australian Retirement Lifestyle Solutions (RLS) range are named Builder, Sustainer and Provider and have varying risk profiles to provide objective-based investments for members at different stages of their life.

But in the UK, its flagship retirement solution works slightly differently, changing asset allocation as the member approaches retirement.

On target?

Many other risk targeted ranges offered by providers work along similar lines.

Craig Wright flags up a potential question for advisers to ask before putting their clients in a risk-targeted fund, namely 'how is risk being targeted?'

“It adds a level of comfort to the adviser that risk is being targeted, allowing clients to remain in a suitable investment,” he points out.

“However, risk isn’t defined in the same uniform way, so understanding how the manager of the risk-targeted portfolio uses their risk budget is key,” Mr Wright suggests.

“We have seen some funds whereby the risk taken has been lower than expected.”

Investing for retirement is not just a case of taking greater risks when you’re young.Eugene Philalithis

The timeframe in which a client has to invest or to meet their overall objective will also affect the type of fund an adviser is likely to recommend.

As Mr Philalithis points out: "Investing for retirement is not just a case of taking greater risks when you’re young. A rough rule of thumb is that if you start saving for a pension in your 40s, then you need to set aside double the amount than if you had started in your 20s.

"A higher risk-rated multi-asset fund, which still has the ability to tactically allocate across asset classes or between different risk assets like equities, property and commodities, would be one solution."

eleanor.duncan@ft.com