What is behind the popularity of multi-asset portfolios?

It is hard to chart the rise exactly, due to some funds changing their names, mandates and even managers thanks to the swings and roundabouts of merger & acquisition activity over the past 10 years.

It is also difficult to pinpoint the exact point at which multi-asset funds proliferated, given the Investment Association (IA) sectors in which these funds tend, for the most part, to sit have also changed in that time. 

The sectors were originally badged as Cautious, Balanced and Adventurous, but are now: 

• Mixed Investment: 0-35 per cent Shares.
• Mixed Investment 20-60 per cent Shares.
• Mixed Investment 40-85 per cent Shares.
• There is also the Flexible Investment Sector, in which some multi-asset funds sit, and the Unclassified Sector.

However, what is clear is that, in the year 2000, hardly anybody in the fund management industry talked about multi-asset investing; now there seems to be a launch of a multi-asset portfolio every quarter. 

What is also clear is these have been popular with the retail market. Investment Association (IA) figures show that, over the past 10 years, the Mixed Investment 20 per cent to 60 per cent Shares sector, in which many multi-asset funds sit, has been the most popular in terms of net retail sales four times. 

"The investment universe, particularly the fund of funds space, has expanded greatly in recent years," says Frank Potaczek, head of UK proposition for Architas. "Consequently, there is a tremendous range of investment opportunities available, regardless of risk appetite or investment goals.

"But with a growing range comes growing complexity, as providers seek niche areas of the market to set themselves apart from their competitors."

As a result, there has been an explosion of funds designated as multi-asset, although it is not easy to compare like for like. 

For example, Defaqto figures cite 229 open-ended multi-asset funds investing directly in securities, and 310 multi-manager funds, covered by its Diamond Ratings service.

However, Morningstar has confirmed there are currently 1,027 UK domiciled multi-asset funds for sale to UK retail investors, and 688 with five-year returns.

Actually, if you take into consideration those which are not domiciled or managed in the UK, there are an eye-popping 11,266 multi-asset funds registered for sale to retail investors in the UK, whose base currency is sterling; most of these are not within the Investment Association sectors and would be available as part of bespoke private client packages from private banks.

Some 2,484 of these have a five-year track record. This means more than 8,000 multi-asset funds have been launched for the UK market since 2013.

Why so many? And what caused this population boom of multi-asset funds?

Market conditions

According to Mr Potaczek, part of the appeal for multi-asset is that it offers the sort of access to a "vast array" of asset classes, but in a more "dynamically managed way than was previously offered by managed funds".

But why should investors want such an array of asset classes?

The current economic climate might give a hint as to why. Volatility, geopolitical uncertainty, low returns from bonds and cash, a global hunt for income: all this is putting pressure on investors to search further afield for their investment returns.

But with this comes additional risk. Mr Potaczek comments: "One of the key benefits of using multi-asset funds is the smoother investment journey they provide and not just the total performance.

"You need to consider what level of volatility a client is prepared to tolerate in their portfolio. At a time when geopolitical concerns are on the rise, and the return of volatility is expected by many, protecting portfolios from large market spikes might be more important than ever."

The attraction of this approach is that it provides a diversified, simple and cost effective investment solution. Andrew Harman

His concerns are based on historical fact: consider the 2008 financial crisis, when all asset classes were seemingly correlated, as they all travelled on the same trajectory: downwards. 

People's funds were not as diversified as they had thought, prompting those who wanted to remain invested to seek out ways to get that diversification along with risk mitigation. 

During times of great market volatility - 2008 being a case in point - multi-asset has done well. A decade ago, the IA Mixed Investment 20 per cent to 60 per cent Shares sector became a place of investment refuge during the Credit Crisis (see Figure 1, below).

Source: Investment Association

Although in 2017 multi-asset funds did not take the top spot - Fixed Income was the winner then in terms of net inflows - they still took in billions of pounds from investors.

Alastair Wainwright, fund market specialist for the IA, comments: "Mixed Asset funds ended 2017 with a bang after receiving £1.7bn in December - their highest net retail monthly inflow ever.

"This brought net retail sales to £13.5bn over the last year. The Mixed Investment 40-85% Shares and 20-60% Shares sectors took in £2.8bn and £2.5bn in 2017, respectively, while £5.8bn was invested in the Mixed Asset category within the IA Unclassified sector."

Andrew Harman, portfolio manager for the First State Diversified Growth fund, believes the reason for the rise in multi-asset funds is because of their ability to adjust for prevailing market conditions, allowing the investor to remain invested, without being caught out by high concentration risk in any one asset class or sector.

He says: "Multi-asset investing offers the ability to allocate to an investment universe of UK and global investments including developed and emerging equities, government bonds and corporate borrowers, commodities, currencies and cash.

"The attraction of this approach is that it provides a diversified, simple and cost effective investment solution."

Additionally, a multi-asset approach offers real-time risk insight and the ability to adjust portfolio positions for prevailing market conditions.

Georgios Bouzianis, analyst at FE, comments: "Multi-asset kicked off after the financial crises of 2008."

Demand

But are individuals really asking for more multi-asset choice, or is the proliferation of product launches down to marketing teams picking up on a popular trend?

Chris Leyland, deputy chief investment officer for True Potential, believes there is indeed demand from advisers and clients for such portfolios.

He explains: "Many clients and financial advisers want a one-stop solution for their investments, which is professionally managed for both asset and stock selection. 

"They understand the need for diversification by country, asset class, industry and currency to take advantage of all the possible opportunities."

With the advent of emergency interest rates and unprecedented quantitative easing, the traditional relationship and behaviour between asset classes broke down. Ben Willis

The economic outlook is a key point for Lukas Daalder, chief investment officer for Robeco, who believes the lack of a decent bond market has created a need for diversified portfolio management.

He comments: "I would attribute the rise of the multi-asset market to the declining attractiveness of the core of the fixed income markets - government bonds.

"Faced with extremely low yields, traditional fixed income investors first moved to credit and the high yield market but with diminishing spreads the next logical step would be to move to equities.

"As the step between fixed income and equities is too big, from a volatility perspective, many opted for the multi-asset spaces. 

"Additionally, multi-assets offer a much more diverse risk-return spectrum than either equities or fixed income can offer on a standalone basis."

Global financial crisis

Many respondents to this guide cited the global financial crisis of 2008 as the ignition that sparked the rise in multi-asset funds in the UK. 

Ben Willis, senior investment manager for Whitechurch Securities, says: "Before the global crisis, particularly in the years leading up to it, advisers were comfortable constructing and running client investment portfolios. 

"Asset classes were displaying traditional traits in terms of diversification and correlation, and the prerequisite risk characteristics. But this investment universe was completely turned on its head after the crisis, and with the advent of emergency interest rates and unprecedented quantitative easing, the traditional relationship and behaviour between asset classes broke down."

He says navigating this new quantitative easing-fuelled investment universe made many advisers unsure as to where they should be investing in a risk-controlled manner for their clients.

To reduce the risk of making the wrong investment decision in challenging market environments, many realised it was safer to leave this to the investment professionals running multi-asset solutions.

Regulation

The Retail Distribution Review (RDR), which caused a seismic shift in the way financial advisers recommended, and were remunerated from, investment products, was also a contributing factor. 

Says Mr Willis: "RDR also had an effect because this examined the role of the adviser, the service they provide and the justification of the fees and charges they levied.

"RDR meant many advisers who had been running client investment portfolios were now not deemed qualified enough to do so. It also highlighted to the advisory community that to justify their fees, they had to provide holistic financial advice.

It has become more important and harder for investors to reduce risk in their portfolios through diversification. Jonathan Webster-Smith

"Plus, the requirements to continue to run client investment portfolios (research, trading etc) to service their clients properly meant outsourcing the actual investment management to qualified investment professionals."

Jonathan Miller, director, manager research ratings, UK, for Morningstar, comments: "As pension rules changed, RDR came in and investors looked for diversified income solutions given low interest rates, multi-asset funds have risen in popularity. This has meant the more expensive fund of funds no longer being a preferred one-stop solution."

James Dowey, chief economist and chief investment officer for Neptune Investment Management, agrees multi-asset funds have become more popular over the past few years "largely owing to regulatory changes and the trend towards financial advisers outsourcing investment".

However, he believes while there has been a proliferation of these products, he feels there is still a "big gap in the market" for multi-asset funds which do the job well while remaining easily understandable to clients.

Risk-adjusted returns

With investors increasingly concerned about the inter-connected world in which we live and the prospect of global volatility having a great effect on investment returns, it is no wonder investors are having to diversify away from the traditional asset classes in order to generate the levels of income they require.

This is the view of Jonathan Webster-Smith, head of the multi-asset team at Brooks Macdonald, who says: "The valuations of many assets are at historically high levels and the correlation between traditional assets such as equities and bonds has increased.

"As such, it has become more important and harder for investors to reduce risk in their portfolios through diversification."

He believes multi-asset products and managed portfolio service (MPS) strategies can help investors access a wider range of asset classes more efficiently, allowing them to boost their chances of "generating attractive risk-adjusted returns".

Mr Miller adds: "There’s also been a move towards remits-based investing around outcomes, which show a target to investors. However, our analysis suggests that these solutions differ little from the more traditional balanced funds when it comes to their risk adjusted return profile, plus they haven’t been tested in a downturn.”

Mr Harman adds: "Multi-asset investing can provide a high degree of diversification and a better risk-adjusted return than a single asset class option, such as fixed income or equities in isolation."

For Peter Sleep, senior investment manager at Seven Investment Management, managing risk is one of the biggest reasons why multi-asset funds have become so popular over recent years. 

"I think the rise is explained by people's increased awareness of risk, which in particular has been driven by greater regulatory scrutiny of risk," Mr Sleep comments.

simoney.kyriakou@ft.com