Searching for the value in the shifting sands of time

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Funds for managing in volatile times

Searching for the value in the shifting sands of time

Are multi-asset funds fit for purpose? Over the past decade multi-asset funds have grown in popularity with IFAs, as investors look to get a diversified portfolio in one fund. 

Investors are also seeking ways to ride out fluctuations in global markets while advisers are trying to get a handle on the increasingly burdensome regulatory requirements that come with managing fund portfolios.

The period of volatility experienced in the UK, which has been unprecedented, has also not helped. Brexit, terrorist attacks in UK cities, high-profile marches against austerity and the Grenfell Tower fire tragedy have contributed to a growing unease in the UK.

As a result, in some camps, advisers are growing cautious about UK-focused funds such as the Investment Association (IA) UK All Companies sector.

Mark Dampier, head of research at Hargreaves Lansdown, said: “Multi asset has been the beneficiary of that. Since Brexit, the media is increasingly pessimistic, so that has in turn spooked clients. The cry from clients is ‘I want to invest globally and not in the UK’.”

Jason Hollands, managing director at Tilney BestInvest, said: “There has definitely been a structural shift towards the use of multi-asset funds. A lot of it is down to the changing regulatory environment.

“Ten years ago a lot of IFAs would have placed the portfolio for clients, but it is more demanding. Most of them are using multi-asset funds or referring their client to discretionary fund managers.”

One-stop shopping

With multi-asset, advisers get a sort of one-stop shop for an investor’s portfolio. They are able to invest across the investment landscape and may include equities, bonds and cash. 

Multi-asset funds are meant to help fund managers achieve their dream of diversification. Even more importantly, they are underpinned by the principle of negative correlation. When one asset class underperforms, the portfolio still meets its investment target because other asset classes outperform.

As long as the assets are not positively correlated and they have been sized correctly, diversification is a valuable investment tool. The trouble is, the sands of correlations are shifting. Since the 2008 financial crisis, quantitative easing has largely driven markets and led to a general appreciation of risky assets.

Key Points

  • Multi-asset funds have grown in popularity for investors wanting a diversified portfolio in one fund.
  • In the past 10 years multi-asset fund sectors have been resilient, but did not have as much growth potential as the UK All Companies sector.
  • Financial advisers do not get full visibility of the different funds in a multi-asset fund.

Lessons of the financial crisis

What the financial crisis also taught the market is that diversification no longer exists in its purest form, according to Robert Wilson, fund analyst at Financial Express.

The market has witnessed rising correlations between asset classes – and what traditionally was the pillar of portfolio management between a composition of bonds and stocks no longer worked.

Stock prices are going up because of expansionary quantitative easing (QE) policies from central banks around the world. Conversely, a move to QE tapering will contract the economy; the markets will become bearish and stocks are likely to go down in value.

If there were to be a big market shock or interest rates were to rise, how prepared will investors be if there is a domino effect of assets falling in value?