Multi-asset investment funds seem pretty Ronseal: pots of different investible assets, combined into one portfolio.
Yet is it really that simple? And if it is, why have so many people got this so wrong, creating ever-more complex multi-asset funds, with ill-defined risk parameters?
One need only remember the Financial Conduct Authority's (FCA's) recent warnings on portfolios that hold illiquid assets - for example, multi-asset portfolios with exposure to property - or its 2015 thematic review, which found a significant disparity between the composition of portfolios and the risk tolerance and investment needs of clients.
Although the 2015 review, Wealth management firms and private banks - Suitability of investment portfolios, was not focused on multi-asset funds per se, the City watchdog did highlight problems with discretionary managed funds that purported to be multi-asset in composition.
This hadn't been anything new to the regulator; as early as 2011 it had sent out a sternly-worded 'Dear CEO' letter, following an earlier review.
The letter warned wealth managers that their supposedly risk-rated portfolio ranges were not being managed appropriately enough and with due regard to the individual client's needs.
The 2011 letter stated:
So, what does make for a good multi-asset portfolio?
According to Andrew Harman, portfolio manager of the First State Diversified Growth fund, it is important to build "truly flexible, dynamic and well-diversified portfolios, without hidden risks".
To do this, he says, investment managers must look to develop "forward-looking estimates for expected returns, volatilities, and the correlations (co-variance between assets)."
He explains that such variables are not static: "The appeal of individual investment opportunities varies over time as valuations change according to prevailing market, economic and political conditions."
He also values the full flexibility and discretion given to managers regarding what to invest in, and what not to, at any point in time. Mr Harman adds: "By dynamically shifting exposures, we can take advantage of investment opportunities as and when they arise."
Diversification seems like a given: after all, it's multi-asset, not single-asset. But as Chris Leyland, deputy chief investment officer for national advisory firm True Potential comments, there's no point having diversification just for the sake of it; it has to be tailored to the end client.
He says: "The client and target market is always the starting point. We look to provide solutions that are suitable for a broad range of clients, their different attitude to investment and, importantly their goals.
"From there, the key is to provide a diversified mix of assets that will work in changing market conditions."
So how to create the appropriate level of diversification?
Robeco’s paper ‘Bonds are from Venus, equities are from Venus too, actually’, shows traditional multi-asset portfolios may look well-diversified, but in fact the assets within may be exposed to the same underlying macro factor.
Robeco identifies six macro factors affecting the variability of returns as: