Multi-asset funds: Risk and suitability

  • Learn how multi-asset funds are constructed and the type of clients they are suitable for.
  • Understand what levels of risk multi-asset funds target and how they do this.
  • Learn how advisers can discern the level of suitability for their clients.
Multi-asset funds: Risk and suitability

Multi-asset funds, as their name suggests, contain investments across several different asset classes - equities, bonds, cash, real estate and possibly other ‘alternative’ asset classes - with the fund manager deciding on the proportion going into each.

At one end of the spectrum, those funds investing mainly in equities, in particular with a significant emerging market component, would be expected to deliver higher returns over the medium to long term but also come with greater volatility. 

While at the other end of the spectrum multi-asset funds containing mostly bonds and cash should be less risky but will probably give less return in the long run.

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The latter would likely be more suitable for investors in or close to retirement and/or those uncomfortable taking risk, while the former will probably be used by clients with a long time to retirement and able to tolerate higher volatility in order to achieve greater returns.

Some managers of multi-asset funds will invest in other funds specialising in the relevant asset class - known as multi-manager - while others invest directly in securities themselves. Also, the investment method may be active, passive or a combination of the two.

Risk targeting

In addition, some multi-asset funds will directly target the risk (volatility) of the fund, usually aiming to keep it within pre-defined bands, with return being the secondary consideration.

Others, meanwhile, will aim to achieve a certain amount of return, although they will usually still be bound by risk in some way e.g. through the Investment Association (IA) sector they sit in.

In the case of those targeting risk, this will be achieved mainly through varying the asset allocation; for example, if the fund’s risk level becomes too high then the equity proportion will be decreased and the amount in bonds and cash increased.

Risk can also be varied by changing the weights of the underlying funds, putting more in ‘core’ funds (those that are highly diversified and following mainstream indices) and less in ‘satellite’ funds (funds with less holdings, higher performance targets and possibly more specialist in nature) in order to reduce risk.

According to our latest numbers, there are currently 310 multi-manager funds available to UK investors and 229 multi-asset funds investing directly in securities. In terms of assets under management, the corresponding total figures were £62bn and £122bn respectively as of late last year.

Following the Retail Distribution Review a few years ago, financial advisers now generally focus on suitability for their clients in the first instance.

As part of this they will undergo a lengthy process of discovery with the client, looking at their goals and determining their attitude to risk and capacity to accept losses.

One of the main outputs from this will be a risk score for the client, often on a scale of one to 10 or one to 100, with a higher number indicating a greater tolerance of risk. The task of the adviser is then to provide an appropriate solution based on this measure.