Why outsource multi-asset investments?

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Aviva Investors
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Supported by
Aviva Investors
Why outsource multi-asset investments?

Financial advisers have been increasingly outsourcing investment decisions and focusing instead on the financial planning aspect of their roles.

Clients benefit from this as it frees up their financial adviser to help them establish investing goals and then go about achieving them.

Outsourcing is an extremely useful tool when it comes to multi-asset investing in particular.

It is true that asset classes have become more highly correlated. 

This means managers, and potentially advisers, have to work harder to assemble a mix of assets which do not move in the same direction, but rather perform differently across market environments.

Ins and outs

Craig Wright, managing director at Tilney for Professionals, explains: “Multi-asset investing is a specialist discipline requiring in-depth knowledge across all of the asset classes.

“Adding to the required knowledge of the ins and outs of each asset class is the time and high cost to research and monitor all the various options available.”

When you’re looking at multiple asset classes which all behave differently at different times of the cycle, you need a mix and complement of skills and particularly analytical responsibility to be able to build that.David Absolon

As David Absolon, investment director at Heartwood Investment Management, puts it: “In terms of why outsource multi-asset investments I think the easy answer is because it’s very difficult to do, it’s much easier when you’re running a single asset class. 

“When you’re looking at multiple asset classes which all behave differently at different times of the cycle, you need a mix and complement of skills and particularly analytical responsibility to be able to build that.”

The cost that comes with this type of investing is also fairly restrictive for advisers.

“It takes infrastructure behind it, so it’s certainly very difficult to do if you have a small amount of assets because you need to resource it properly,” he adds.

A survey by Investec Wealth & Investment conducted among 107 intermediaries reveals two-thirds of financial advisers, 64 per cent, believe it will be much harder to keep investment management in-house over the next two years. 

The reasons they offer for this include the administrative burden involved and lack of resources.

According to IW&I, 82 per cent of advisers cited due diligence demands as the key reason why in-house management services will be harder to provide, followed by a lack of a dedicated in-house research team (63 per cent), too much administration, which was cited by 55 per cent of respondents, and insufficient qualifications and regulatory permission (44 per cent).

The problem is even more acute among smaller adviser firms, the research suggests.

Twin challenges

Mark Stevens, head of intermediary services at Investec Wealth & Investment, explains: “Advisers have multiple calls on their time and most realise that it will become increasingly difficult to cover all the traditional bases satisfactorily and have any chance of successfully growing their business.   

“Advisers are now facing the twin challenges of volatile markets and ongoing compliance and regulatory demands.”

He predicts conditions will, if anything, become increasingly tougher and reckons “more advisers who have yet to outsource key services such as investment management are likely to do so”.

Bill McQuaker, portfolio manager of the Fidelity Multi Asset Open range, agrees there is a strong case for advisers to outsource multi-asset decision making.

“Building multi-asset portfolios is a specialist job and so it makes sense to outsource it,” he states. 

“From a process perspective, you have to get the right long-term asset allocation, be able to make evidence-backed tactical decisions and then select the best instruments through which to implement your views. That takes a lot of time and research from across a wide range of investment disciplines.”

Investors have to work harder to find diversified, uncorrelated positions, whether that’s in esoteric areas of fixed income like loans, or alternatives like commodities and infrastructure.Bill McQuaker

He also believes the macroeconomic environment, and specifically central banks’ commitment to quantitative easing in the UK and US in recent years, has made it harder to build diversified multi-asset portfolios. 

“Correlations have risen across asset classes, as well as between individual equity regions,” Mr McQuaker observes. 

“Investors have to work harder to find diversified, uncorrelated positions, whether that’s in esoteric areas of fixed income like loans, or alternatives like commodities and infrastructure.”

Rob Hall, head of client portfolio management at Russell Investments, adds: “In a world of low rates and quantitative easing, historical relationships between asset classes have broken down and historic rules of thumb no longer apply. 

“It is important to know how investments interact in order to build a well-rounded and diversified portfolio.”

Where before, advisers would have needed to monitor ongoing investments in a multi-asset portfolio, they can now outsource that to the portfolio manager which means their focus can be on whether a client’s overall investment portfolio is doing what it should.

More products

There has been a proliferation of multi-asset vehicles over the past few years, with solutions aimed at all types of life stages of the retail investor.

With the number of multi-asset products available to retail investors, advisers still have a challenge sifting through them all to find the right approach for their clients and this still forms a key part of an adviser’s role.

The end result is the client should benefit from the array of more sophisticated multi-asset products in the market.

Through outsourcing, investment advisers avoid the challenges of minimum investment sizes, transaction costs, manager monitoring and limited asset class access.Andrew Harman

Andrew Harman, portfolio manager in the multi-asset solutions team at First State Investments, explains: “The benefit of outsourcing multi-asset investments is advisers provide their clients with more sophisticated, diversified and flexible offerings. 

“Outsourcing multi-asset investment allows greater diversification, real-time risk insight and the ability to adjust portfolio allocations for prevailing market conditions.

“Through outsourcing, investment advisers avoid the challenges of minimum investment sizes, transaction costs, manager monitoring and limited asset class access.”

In turn, having access to a wider range of asset classes and investment strategies across different investment markets and geographies should mean the investor realises a better risk-adjusted return and performance profile that is less dependent on the direction of financial markets, he argues.

“Implementation across asset classes also requires specialised expertise in execution and settlement as often a number of different vehicles (e.g. securities, ETFs, derivatives) are available to achieve the same exposure,” says Altaf Kassam, EMEA head of strategy and research, investment solutions group, for State Street Global Advisors.

“For clients who do not have the resources to conduct this breadth of research in sufficient depth, and effectively implement, the outsourcing of multi-asset investments makes sense.”

eleanor.duncan@ft.com