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.
Strategic asset allocation is essentially the medium to long term view on markets. Nathan SweeneyMr 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.”
Tactical or strategic?
Multi-asset funds should be a mix of tactical and strategic decisions, experts believe.
According to Mr Harman, as the opportunities within multi-asset is vast and wide ranging, “multi-asset portfolios should have a foundation based on economic fundamentals in the asset allocation, but also take into account the short-term opportunities in markets”.
First State reviews the longer-term asset allocation of the fund twice a year, or more often if needed, as it was with Brexit.
He added: “Our dynamic asset allocation takes into account the shorter-term market dynamics to deliver additional returns and abate portfolio risks, such as tail events.
“This part of the process is reviewed more regularly and aims to take advantage of possible dislocations in financial markets.”
Mr Sweeney also agrees that multi-asset should be both strategic and tactical in terms of asset allocation.
He said: “Strategic asset allocation is essentially the medium to long term view on markets. This forms the backbone of our multi-asset risk profiled funds.
“As an example, in 2017 we were in a low interest rate, low volatility world and our portfolios had a strategic positioning towards income funds in portfolios.”
Nevertheless, he argued that the strategic asset allocation should evolve over time.
“There are instances where there is a wholesale change in market direction so tactical decision making is required,” he noted.
However, tactical decisions are not knee jerk reactions to daily or weekly fluctuations in the market.
If a tactical multi-asset fund generates consistent and strong returns for the end investor, then I would regard that as an attractive fund. Darius McDermottMr Sweeney said: “We have an asset allocation process that enables us to implement tactical asset allocation views on a short to medium-term basis.
“However, we have a rigorous research process to ensure these tactical decisions will lead to well thought out investment decisions. We have to be able to explain clearly all of our investment decisions in a very succinct manner.”
Mr McDermott argued that the balance between tactical and strategic is “ultimately about adding value for the end investor”.
He said: “If a multi-asset manager is investing strategically – ie, they have a lower turnover portfolio – then perhaps there is less pressure on them to generate returns as high as those which invest tactically and therefore incur higher charges.
“That said, if a tactical multi-asset fund generates consistent and strong returns for the end investor, then I would regard that as an attractive fund.”
Mr McDermott concluded: “It isn't all about the cost of a fund – it's about whether the quality of the returns you get from a fund justify the charges you are paying.”
Maria Espadinha is a reporter for FTAdviser
