Multi-assetSep 13 2017

Multi-asset investing in times of volatility

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Multi-asset investing in times of volatility

With Donald Trump and Kim Jong Un engaging in unpredictable behaviour in recent weeks, and UK politicians struggling to put together a Brexit policy, clients may understandably be feeling a little nervous.

Volatility is clearly the aspect of investing that some clients feel nervous about – when markets overreact it can often feel like playing the casino. But advisers have been deriving a variety of responses to changes in the markets, and threats, perceived or otherwise, on the geopolitical level.

The stock markets have been on a bull run since the start of the year, rising 200 points to over 7,300 in the middle of August. The markets had little response to the initial Trump/North Korea stand-off, despite the best efforts of the newspapers, although stocks in Europe fell one per cent the day that North Korea sent a missile over Japan.

But how is this affecting clients? Some advisers have noticed a real reticence on the part of clients, and many other advisers are telling their clients to stay in touch, and remind them that they are well prepared for any particular downturn.

Concern

Keith Churchouse, director of Surrey-based Chapters Financial, said: "People have been going on holiday and seeing the real effects of sterling disappearing; where generally we might have paid 5 euros for a beer, now you're paying 7 or 8 Euro.

"There's a fear we might have to go back to another election and if that's the case that's going to create confusion and delay. I think there's a real lack of confidence in our politicians to be able to deliver anything significant."

There's a fear we might have to go back to another election and if that's the case that's going to create confusion and delay

While some may be avoiding the markets others are becoming more mindful of the risks and are adjusting accordingly.

Chris Ball, a financial planner at Leicester-based Boolers, said: "If you consider in our world people either take risk or they don't take risk, it's either cash or equities; we've not changed advice, but people may consider pound cost averaging.

"If somebody has £100,000 to invest, they may want to make that money work harder, then you might put that in over six months rather than put it all in the market on day one. If you put it all in the market immediately and World War three starts, you can see that disappear.

"People are reducing their short-term portfolio risk by drip feeding into the market but they're comfortable with long-term risk because they know that money will work harder than cash and inflation.

"Volatility is important and people are inclined to manage some of the short-term risk, but they still use long-term risk assets because time is important."

Key Points

  • Investors are worried about volatility in stock markets following instability on the world stage.
  • Multi-asset investing is the way to manage volatility.
  • Some advisers prefer picking their own funds to develop a multi-asset investment philosophy.

Alan Steel, chairman of Alan Steel Asset Management, said his clients are comfortable with the volatility in the markets because he stays in touch with them and reminds them that their portfolios are well-prepared for any possible downturn.

He said: "We communicate with our clients every fortnight. Increasingly newspapers and "'bad' news at Ten" is making people worried." He added that some consumer investment platforms were seeing people constantly checking their portfolios many times a day, which just added to their fears.

"The recent Trump and North Korea thing is a 'My Dad is bigger than your Dad – it's of little consequence. We think this is a buying opportunity.

"We've got a structure in place that's defending it on the downside - be prepared for scary headlines for six months but I still suspect it will be a white Christmas.

"We run a fantasy fund manager team, and what you do is take risk off the table by using Sebastian Lyon, an arch passive at Troy Asset Management. He's our number one 'goalkeeper'. In 2008, Seb's fund went up – he is 25 per cent cash, he has gold, index-linked treasuries and big defensive equities. "

One option considered by many advisers for their clients is the use of multi-asset funds. Coming in a variety of formats, multi-asset funds provide the diversification that a lot of clients need, suitable for investors with less to invest.

 

Diversification

Andy Gadd, head of research of Lighthouse Group, said: "In this day and age, diversification is a simple investment concept because it reduces risk. In the current volatile market, various multi-asset funds will increase their cash allocation or gold allocation. 

"Diversification reduces risk and it's all done within one fund, and you have one fund manager to do the allocation. When an IFA sees a multi-asset fund, it makes it easier to match that fund against your risk profile. They do do what they set out to do."

"Fixed interest is interesting at the moment as we're seeing there's a bond bubble so managers are making sure they've got short duration bonds. 

Multi-asset fund managers are tailoring their funds to the prevailing currents in world markets. Mr Gadd said: "Some funds aren't holding fixed interest because of the danger fixed interest is over heating due to quantitative easing. They might hold cash or absolute returns.

"Some fund managers like Schroder have 20 per cent in cash. I don't have any reason to see that as a bad move, they're looking for better opportunities. For example, absolute return funds, it does what it says on the tin - it will always give you positive returns."

 

Behavioural science

Mr Steel has spent years planning for the worst scenario. he said: "Behavioural scientists will tell you the pain of losing is at least double the joy of winning. For at least the last 20 years we’ve believed in protecting investors’ wealth first, using defensive funds.  After all, the most successful teams in sport build from the back, not the front.  

"So to us our goalkeepers are our multi-asset stars - nothing complicated like derivatives or leveraged ETFs. Long-only commonsense, using non-correlated fairly or undervalued sectors.

"That is why we especially like Mr Lyon at Troy who we've backed for over 10 years, and David Jane at Miton who we’ve backed since his days as CIO at M&G when he launched their Cautious Multi Asset fund with his mum in mind.

"And with gilts and treasuries such poor value, and half of world’s long bonds in negative yields, bond funds as defenders don’t make any sense. It is an even bigger Bubble waiting to burst than the Dotcom one.

"But like all other sectors, quality of manager is sacrosanct, so multi-asset has its place for sure.  However, if it’s popular now, with billions flowing in, that’s also a good sign for equity optimists."

 

Business as usual

For many fund managers, the fears stalking some people's minds is simply business as usual. Alan Dick, director of Glasgow-based Forty Two Financial Planning, said: "Volatility in what's happening today is irrelevant. The world is always volatile – there's always things going on that we could be worried about. I think we should be worried about volatility as a default position, not just what's happening now."

Mr Dick is a firm believer in multi-asset investing, but prefers to diversify using his own judgement rather than through the decision-making process of a fund manager. He said: "We are almost 100 per cent 'systematic' investing; we use index trackers and asset class funds like Dimensional. That is pure multi-asset investing. We have a fund that just follows the return of the FTSE, the FTSE World Index and emerging markets.

"We're using an asset mix rather than pay a fund manager to choose a fund. We don't believe anybody has a crystal ball to let you see the future. We prefer someone to have a sustainable risk profile on asset allocation."

As a fundamental of investment theory, diversification through multi-asset investing is a popular choice, whether through self-selecting decisions made by the adviser, or through outsourcing those decisions through a multi-asset fund.

Melanie Tringham is features editor of Financial Adviser