Searching for the value in the shifting sands of time

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?

Not very, according to Mr Dampier. 

He said: “Multi-asset funds have served investors pretty well over the last 30 years. If there is a steep rise in interest rates the danger is that multi-asset fund investors might be massively disappointed when there is a crunch.

“Diversification at the moment is hard. If the government starts moving away from quantitative easing and you are an investor that buys UK All Companies, people will be expecting things to be hard, but multi-asset fund investors may not be expecting things to get as hard.”

Over the past 10 years multi-asset fund sectors have shown that although they have been more resilient to shocks, they do not have as great a growth potential as the UK All Companies sector, which is to be expected. 

According to some advisers there is a place for multi-asset funds, primarily because of this protection they offer.

However, Brian Dennehy, managing director at Dennehy Weller & Company, does not believe multi-asset always provides the best value for investors. 

Mr Dennehy said they are being promoted by advisers because the majority find it harder to manage the individual focused funds.

He said: “The advisers are the ones who are choosing these funds on behalf of advised clients, but there is an inherent problem with multi-asset funds. They are more expensive and compromise on performance.”

He explained that this is largely because advisers are not picking the funds themselves. Although they might get a fact sheet with information about the fund, it still does not allow them to get full visibility of the different funds in order to make “critical decisions”.

Echoing his thoughts, Abraham Okusanya, consultant at FinalytiQ, said most multi-asset funds were not doing what they said on the tin.

Downside protection

Mr Okusanya said: “From what we have seen there’s no evidence they can provide downside protection, if you look at their performance. When the market goes up they go up. When the market goes down they go down.”

However, Mr Wilson said there is added value in multi-asset funds. He said: “If you just consider the main market shocks of 2011 European Sovereign Debt crises, the 2013 US Taper Tantrum and more recently the June 2016 UK Midcap sell off – the FTSE All Share experienced a larger sell off than the multi-asset sectors.”

He pointed to stats collated by FE, which showed that the three multi-asset sectors had grown at a more stable rate than the fluctuating FTSE All Share Index. Since January 2007, the Multi-Assets 0-35 Per Cent Shares in TR GB has grown 43.62 per cent, the 20-60 Per Cent Shares have gone up 53.8 per cent, while the 40-85 Per Cent Shares jumped 71.79 per cent.

Although it was more volatile, the FTSE All Share performed well over the 10-year period; going up by 83.89 per cent.

Mr Wilson said: “You can also note that the multi-asset sector with the smallest composition of shares has the smoother profile during all the noted market times of distress. With bonds protecting capital as required.

“The FTSE All Share gives you the higher risk and higher reward pay-off, with risk measured in higher volatility – also currently outperforming all the other multi-asset sectors. For those investors who are more cautious and in search of yield, a multi-asset product tempers that for them.”

“With changing structural trends and macro headwinds and tailwinds, there is alpha to be gained from good allocators that can make the right calls. With current frothy equity valuations, there has been a growing trend of multi-asset managers adding more into their alternative buckets as the search for uncorrelated strategies moves into more niche areas, such as aircraft leasing, infrastructure or reinsurance to name a few, and managers continue to worry about correlations and tail risks.”

Additionally, he said more managers are also purchasing protection, in the form of puts or gold, with heightened geopolitical tensions and no sign of US tax reforms or Brexit blueprint.

Mr Wilson said: “In sum, we do find a lot of value in multi-asset products. You just have to sift through and avoid the mediocre and below average in order to make it worth your while.”

Ima Jackson-Obot is a features writer for Financial Adviser