Multi-assetOct 17 2018

One fund, one focus for investors

Supported by
Quilter Investors
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Supported by
Quilter Investors
One fund, one focus for investors

A dizzying number of offerings from fund houses and discretionary managers is available on the market, with multiple approaches to elements such as risk profiling and volatility management.

Case in point: there are more than 300 funds in the Investment Association (IA) mixed investment 0-20% shares and IA mixed investment 40-85% shares sectors alone.

Indeed, the multi-asset sector has been going through a boom. Assets under management in mixed asset funds have been climbing steadily over the past decade, with £221.7bn under management in 2017, compared with £56bn in 2008.

In 2017, net retail sales hit a 10-year high of £13.3bn, more than double the inflows of each of the previous three years.

With an uncertain market outlook prompting investors to seek diversification, and tighter regulations encouraging many advisers to outsource their investment management, multi-asset’s popularity looks unlikely to diminish any time soon.

A buffer from market shocks

Funds tend to come into favour when their asset classes perform particularly well, so the fact multi-asset has seen a surge of inflows may suggest investors are nervous about where markets are headed.

Frank Potaczek, head of UK proposition at Architas, says the return of volatility to financial markets has given investors a jolt.

“Many investors were lulled into a false sense of security in 2017 as markets took everything in their stride. Even rising tensions between North Korea and the US were unable to knock the confidence of investors."

He adds: “At a time when geopolitical concerns are on the rise and volatility has returned to markets, protecting portfolios from large market spikes is possibly more important than ever.”

Single portfolio solution

As an outsourced solution that is diversified enough to provide some form of cushion from market events, it is easy to understand multi-asset’s appeal to advisers and investors alike.

Mr Potaczek says regulation has been one of the drivers of investment outsourcing and today’s adviser needs to work out where the real value is for them and their business.

“Is it in providing the investment piece in-house with the associated hours spent on fund selection, or are they better off focusing their time on financial advice?” he asks.

A multi-asset solution can take several forms. These include risk-managed funds, outcome-orientated funds, passive multi-asset portfolios, model portfolios, discretionary fund managers, with-profits funds as well as traditional multi-asset funds that are not aligned to any volatility or risk targets.

“There is certainly no right or wrong approach for advisers, but the regulator is increasingly focused on the repeatable process advisers use to ensure the investment outcome is suitable, and remains suitable, for the client,” Mr Potaczek says.

Rick Eling, technical director at Quilter, which owns adviser network Intrinsic and Quilter Private Client Advisers, says whether it is an open-ended fund or a discretionary fund manager, the benefit to multi-asset is that it is a one-fund portfolio solution.

“Our philosophy as a business is that clients are better off in a well-diversified, multi-asset portfolio,” he comments, adding that there is no need to mix more than one multi-asset fund within a client’s portfolio.

Kicking the tyres

So how do advisers make a confident fund selection? For Mr Eling at Quilter, the objective when choosing funds for Intrinsic’s matrix of external investment funds is to select those that match their clients’ typical risks levels. This is not always a straightforward task, he adds.

“One of the challenges is that we’re trying to pick funds that fit our risk scale, but different fund houses have different ways to measure risk,” he says.

When selecting funds, Intrinsic’s management investment group analyses funds based on their risk profile rather than through expected returns, drawing on expertise from Morningstar and Square Mile Research.

When they are happy with a fund’s risk profile, they will then analyse its charging structure, investment style and objectives.

Richard Stammers, chief investment strategist at KW Wealth, says while his firm builds multi-asset discretionary portfolios for most of its clients, they will use a fund for clients with smaller portfolios. While there is no shortage of funds available, he says the difficulty is in finding an external manager whose investment approach matches its own.

“Our challenge is finding multi-asset funds for small portfolios that match our view of the market,” he says. The due diligence process at his firm can take anywhere from a few days to a week, which includes a full quantitative and qualitative analysis of the fund’s investment approach and management team.

External research providers serve to bolster advisers’ due diligence efforts, whether they are large firms like Quilter or smaller firms like KW Wealth. These research providers include the likes of Defaqto, Financial Express, Morningstar, Square Mile Research and Rayner Spencer Mills. 

Diane Earnshaw, head of client relationships at Square Mile Research, says her firm analyses funds on multiple levels, which include looking at its investment objective, charging structure, fund manager systems and capabilities, investment process, risk controls, investment universe, transparency of holdings and more.

She says Square Mile will also conduct a quantitative analysis to ensure a fund can deliver good risk-adjusted returns.

“We start by asking, does the fund have a clear outcome?” Ms Earnshaw says, adding that one of the most important aspects is knowing what the fund is trying to achieve and what its risk profile looks like. “Fees are also important because there’s a compounding effect over time. It’s not all about cost but it is about value for money.”

Ensuring the right fit for the client

Once the initial due diligence is complete, the next step is matching the solution to the client and ensuring it continues to be the right product for the job. The focus for many advisers is less on absolute performance and more on risk appetite, investment outcomes and cost.

Mr Stammers says many clients see their investments simply as a means to an end. “They’re less concerned about what they’re invested in and instead care about what they achieve.” 

For that reason, he says it is important to ensure a fund is continually achieving the right outcome for the client.

“One of the big issues that advisers need to consider is the one-size-fits-all notion,” Mr Stammers says. “Clients change, so you need to keep things under review and make sure the fund’s suitability hasn’t changed.”

Alasdair Walker, chartered financial planner at Hunter, Aitkenhead & Walker, says his firm uses a mixture of multi-asset discretionary fund management solutions and more traditional multi-asset model portfolios. He says his firm conducts annual reviews at a provider and fund level as part of its ongoing due diligence process.

Mr Walker says while today’s multi-asset funds are a major improvement over the multi-manager funds and other solutions seen just 10 years ago, this does not mean they can not improve further.

Indeed, one area where multi-asset still has room for improvement, he adds, is around cost to the client – and that issue is still ongoing.

Geordie Clarke is a freelance financial journalist