Seeking best of breed multi-asset funds

Seeking best of breed multi-asset funds

Many advisers understandably crave simplicity.

Our working days are complicated enough, so a single fund solution that gives diversified exposure to different asset classes is, on the face of it, appealing. But this raises lots of questions. 

The one way in which advisers can prove they add value, year after year, is by selecting investments for the clients that provide outstanding performance.  

Can multi-asset funds achieve such outstanding performance? If they can’t, how do advisers justify their fees, particularly if fees are calculated as a percentage of assets?  

Multi-asset funds are marketed as a way of accessing the best of breed in the investment management world. There is no evidence that this is happening. In 2012, I said these funds “are all too often expensive client solutions from lazy or poorly qualified advisers”.  If that was fair comment then, what has changed?

There is not space to do justice to the answers to those questions today, but doubtless some of you will add your own pithy responses online.

The lack of a single sector certainly does not help an adviser determined to seek out the best of breed multi-asset funds. 

They are mostly spread across four different sectors, and I will focus on one way in which we dug around for the gems.

We developed our ‘Vintage’ ratings for clients who would like a bit less portfolio activity, but still like to achieve better than average performance. Vintage ratings tell us about the quality of a fund along with the likelihood of the fund maintaining above-average performance. 

The ratings are derived from 10 years’ worth of data. For the totality of the fund universe, 92 per cent of funds failed this basic test, which is to be in the top 40 per cent of funds 60 per cent of the time.

Looking at the four Investment Association multi-asset sectors in particular, a summary of the findings is as follows: of the 97 funds in the IA Flexible sector, 11 per cent were Vintage funds; of the 48 funds in the IA Mixed Investment 0-35 per cent Shares sector, 4 per cent were Vintage funds; of the 126 funds in the IA Mixed Investment 20-60 per cent Shares sector, 8 per cent were Vintage funds; and in the IA Mixed Investment 40-85 per cent Shares sector, 5 per cent of the 149 funds were Vintage.

These results are not a great advert for active management, with their inability to beat a basic test. But advisers can prove their worth by developing a process to uncover the best of them, which does evolve over time.

Using our Vintage analysis, we created four portfolios using the top three Vintage funds from each of these sectors, with annual reviews.  

All the Vintage portfolios outperformed their sector averages for the period 2004 to 2018. The best performing portfolio was based on the IA Mixed Investment 40-85 per cent Share sector, beating the sector average by 52 per cent from 2004 to 2018.