Multi-asset funds have become more popular in the last decade, since the financial crisis showed the importance of holding non-correlated assets, and having portfolios able to respond quickly to world events.
However, how active should a multi-asset manager be? If they’re not active enough, and don’t make timely tactical decisions, they might not be adding any value to the fund.
But if they’re too active, and make several changes, they could end up incurring high trading costs and potentially erode fund performance.
Andrew Harman, portfolio manager at First State Diversified Growth Fund, believes multi-asset investing should be flexible and dynamic.
He said: “The appeal of individual investment types varies over time, as valuations change according to prevailing market, economic and political conditions”.
As any of these variables change, the manager needs to evaluate the benefit of the investments within the fund, he added.
Mr Harman argues that holding ‘defensive’ strategies, or any investment that have very high valuations – which are expensive – exposes investors to loses, regardless of past performance.
He said: “We believe that our approach designs and implements truly flexible, dynamic and well-diversified portfolios – without hidden risks.”
Nathan Sweeney, senior investment manager at Architas, argued that a multi-asset manager needs to be as active as it is required to position the portfolio to capitalise on current market conditions.
He said: “The whole purpose of multi-asset is selecting managers and sectors that will benefit from the existing market environment.
“This environment is always changing and evolving, whether it is tax, regulation, monetary policy, or the performance of different sectors.
“Because of these continual changes no single fund or sector will consistently be able to perform.”
Mindful of costs
In specific circumstances, Architas is willing to accept higher trading costs. This is “because we are willing to back our rigorous investment process,” Mr Sweeney said. He added: “There are therefore periods when we will have a higher turnover in portfolios.
“Recently there has been a slight increase in turnover, as we have moved from an income bias within our underlying funds to those active managers with a higher conviction that we believe will benefit from higher levels of volatility in markets.”
One area where Architas is particularly mindful of costs is property funds.
Mr Sweeney said: “Some of these funds charge high fees to enter a fund and some even have an early redemption fee. It is therefore an area that we are mindful of when allocating to and from the property sector.”
According to Darius McDermott, managing director at Chelsea Financial Services, “there is no right or wrong answer when it comes to how often a multi-asset manager chooses to trade”.
He said: “In my view, the most important factor to take into consideration is whether the portfolio is genuinely diversified.
“Many multi-asset funds will only hold equities and bonds, for instance, whereas I would like a portfolio to hold a broader range of assets.”