The strategy that keeps on giving

At the end of 2008, there was £56.3bn invested in “mixed asset” funds, according to data from the Investment Association, and this figure rocketed in the years that followed, reaching a whopping £221.8bn by the end of 2017.

An upwards correlation of new sales in 2015, 2016 and 2017 suggests this figure will grow still further. Retail sales of mixed asset funds were the second highest asset class in 2017, behind fixed income, accounting for £13.4bn of new sales, according to the IA.

An academic study published in The Journal of Portfolio Management at the beginning of 2018 concluded that the sustained appeal of these funds was the “potential for improved diversity, greater liquidity and reduced volatility”. The study also found that investors were drawn to these funds’ ability to fit with “a variety of investment approaches and asset class categories”.

However, while the IA’s sales figures underscore the appeal, some intermediaries are cautious as to the suitability of multi-asset funds to the mass market.

Patrick Connolly, a certified financial planner and representative for Chase de Vere, acknowledges these funds have increased in popularity as a result of clients’ growing awareness of the need for diversification, but warns that they inevitably will not suit everyone.

“What multi-asset funds do, is provide an all-in-one solution,” he says. “They are ideal for people with relatively small investments, as it can be far more of a challenge to diversify by investing in individual funds. 

“It is also ideal for those that want a buy-and-hold solution, who are not going to have to review their portfolios on an ongoing basis, or those who aren’t looking for ongoing advice. So, yes, there is definitely a niche that they fit.”

Mr Connolly explains that Chase de Vere clients were typically not offered multi-asset solutions “very often” because they generally have larger sums to invest and, therefore, require investment advice on an ongoing basis.

“Our clients tend to retain us, and have more money, so we run bespoke portfolios for them instead,” he says.

Tracking the evolution

While multi-asset investment funds have seen their popularity soar in the retail space over the past decade, the reasoning for their existence is grounded in research that is far older.

In 1952, the Journal of Finance published a paper on portfolio selection by economic theorist and Nobel Prize winner Harry Markowitz, which considered a mathematical link between portfolio diversification and risk reduction.

In the decades that followed, investment houses steadily built a suite of products to serve investors’ growing appetites to diversify. Initially, the appeal of a multi-asset approach was seen in the growth of with-profits funds in the 1980s and 1990s.

However, a series of scandals – including the much-publicised Equitable Life fiasco – led to a decline in their popularity and new regulatory guidance to govern the sale of these products.

Regulatory scrutiny of investment vehicles has tightened still further since the turn of the millennium, and has led to a reclassification of mutual funds in the IA’s sector. In 2011, the Investment Management Association (as it was then known), reclassified funds in its Cautious Managed, Balanced Managed and Actively Managed sectors with alphabetical labels – Managed A, Managed B and Managed C.

Since then, the IA has badged these sectors by the percentage of equities that each fund holds:

• i) Mixed Investment: 0-35 per cent Shares
• ii) Mixed Investment 20-60 per cent Shares
• iii) Mixed Investment 40-85 per cent Shares.

Those that do not fit the bill can find a home in the Flexible or Unclassified sectors. These final two sectors may well expand in the coming years, as investor interest in diversification and technological developments trigger the growth of more sophisticated multi-asset products such as risk premia funds, which were previously the preserve of hedge funds.

Dale Erdei, head of intermediary sales at JPMorgan Asset Management, explains that the story of multi-asset funds in recent years has been less about “evolution” and rather one of “proliferation”.

“The spectrum of multi-asset funds is now wide-ranging,” he says. “There are strategies that may only invest in two different types of securities being labelled as multi-asset. We’re also seeing the launch of increasingly complex products, which may use different or multiple types of securities within their portfolio, entering the multi-asset fray.

“The popularity of multi-asset funds doesn’t seem to be waning, with many investors using these solutions to access less traditional parts of the investment universe that may have not been as easy to access in the past.” 

So where next?

The insatiable appetite for multi-asset funds looks set to continue, according to industry figures, who note continued volatility in the bond market as a likely trigger for a rethink of some investor allocations in fixed income.

“Bonds haven’t had the best time of it this year, and they have been a disaster for a lot of investors,” says Charles Hepworth, investment director of the multi asset class solutions team at Swiss fund manager Gam.

The growing bearish sentiment may push investors towards multi-asset style funds, according to Mr Hepworth, who says that Gam’s preference for more exotic fixed income investments, such as mortgage-backed securities and emerging markets debt, in recent years had protected capital.

In an interview, the investment director said that Gam is now looking to add exposure to absolute return strategies over the coming six months and will be evaluating strategies in volatility trading and merger arbitrage, among others.

However, when asked if intermediaries should expect to see a flurry of new launches to accommodate similar thinking in the retail market, he said this was unlikely.

“Investment houses are always too reactive on fund launches,” he said. “The ones to benefit will be those that already have the early mover advantage, that are already listed, and are starting to shine again. 

“Most houses won’t launch this kind of product unless they have the skillset to do it. It goes in a cycle of asset allocation changes. It is not going to be the best investment, but it will have its moment in the sun, and we are getting nearer to that point."

Joe McGrath is a freelance financial journalist