Multi-asset 

Round one: passive versus active

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Wide exposure, but low in cost

Round one: passive versus active

Multi-asset funds are becoming a popular solution as investors look to diversify their holdings and invest across several asset classes in one fund wrapper.   

But should advisers’ clients invest in an actively managed or a passively managed multi-asset fund? That can be a difficult decision to make.

Typically, clients may favour passive funds for their lower charges, but advisers should be able to help them understand which type of multi-asset fund best suits their needs.

The active versus passive debate has been bubbling away for several years, as providers of passively managed funds continue to cut costs, creating a highly competitive industry.

Meanwhile, advocates of active funds argue these types of funds tend to outperform the benchmark, as experienced fund managers actively choose holdings for their funds.

Costs count

James Penny, senior investment manager for Tam Asset Management, says: “Diversification is key in today’s markets and unconstrained multi-asset funds should be among some of the most diversified product ranges available to investors who want to get exposure to the best opportunities around the globe.”

Mr Penny adds: “That goes for both passive and active multi-asset funds, because while a passive investment is fixed in terms of the scope of what it owns, there are thousands of passives representing all facets of the investment world. A multi-asset fund can use this to construct an active investment approach to the market, which sees the active sum of the portfolio being greater than its passive parts.”

One of the biggest potential advantages of investing in a passive multi-asset fund is the access to diversified investment opportunities at lower prices than actively managed funds.

Laith Khalaf, senior analyst at Hargreaves Lansdown, says: “Passive funds have the benefit of [being] low cost, whereas active funds at least give you the opportunity to outperform the markets you are investing in if you choose the right manager.”

But Mr Khalaf adds: “Passive fund returns will be dominated by asset allocation, which is more of an art than a science, so we prefer active multi-asset funds that also get driven by stock selection, in case the manager gets their asset allocation calls wrong.”

Key Points

  • There are passive and active multi-asset funds available to clients.
  • Passive multi-asset strategies are typically lower in cost.
  • Many favour active multi-asset for its ability to outperform.

A multi-asset fund is a combination of asset classes, such as equities, bonds, property and other alternative assets. The types of asset classes and asset allocation will vary according to the investor’s risk appetite.

Mark Shields, investment director for the multi-asset team at Brooks Macdonald, says the benefits of multi-asset passive investment strategies include easier asset allocation and diversification, in addition to lower charges.

Mr Shields also notes that passive multi-asset investment strategies typically reduce the risk of human error or underperformance against a given benchmark.

As active funds offer opportunities to beat benchmarks, it means they “allow top-rated fund managers, who have been able to deliver such outperformance consistently, to charge higher fees for their services. For this reason, it is important for investors who wish to use active managers to be able to identify which are most likely to perform well”, says Mr Shields.