Multi-asset  

How to mix and match your multi-asset funds

  • Describe new ways of building multi-asset portfolios
  • Describe the method for calculating the capital market return
  • Identify the ways of achieving true diversity with multi-asset funds
CPD
Approx.30min
How to mix and match your multi-asset funds

I think it is true to say that multi-asset solutions are generally aligned to risk schemes and advisers seek solutions that they can recommend seamlessly in conjunction with their attitude to risk process and tools (and by 'solutions', I mean funds and DFM models/bespoke portfolios).

For example, if I think about multi-asset clients I mentioned above, all provide solutions that Defaqto risk-rate across our risk profiles, and exhibit diversity as follows:

  • One manager provides a range of funds for advisers who want to opt for a broad range of risk-rated solutions from a single provider.
  • Another, offers just a single fund. Operating on a multi-asset basis, but seeking to provide low-risk, inflation-linked returns.
  • One runs a global balanced multi-asset growth fund, which operates on performance fee basis.
  • And, finally, another believes in a multi-asset approach to deliver a high level of consistent income, while growing capital over time.

This demonstrates to me, that this sector continues to become more diverse and complex.

Going back a few years in history, I recall when the likes of Jupiter Merlin were identified as being early protagonists of something called ‘multi-asset’ funds and then we saw the emergence of risk-targeted/rated families such as F&C Lifestyle (now BMO) and Skandia Spectrum (now Old Mutual Creation). 

Diversity has continued to blossom, seeing the launch of active/passive/blended solutions such as, Standard Life MyFolio’s and Architas.

At the same time, we have also seen the emergence of risk aligned portfolio ranges from discretionary fund managers and, as a result, I believe that the market has come to associate multi-asset with fund ‘families’.

While ‘families’ provide excellent solutions for advisers seeking consistent funds/portfolios from a single provider, the resurgence of more diverse single fund/portfolio solutions, in the same vein as Jupiter Merlin, is creating portfolios that use a range of several multi-asset solutions for a single risk aligned recommendation. 

This is confirmed, when we look at the recommendations made by advisers using our Engage software.

Risk-rated

On average, we see two to three risk-rated solutions being proposed for one investment recommendation. The interesting observation is, that all the funds being recommended are risk-rated at the same level.

So, why would this be, when a single multi-asset risk-rated solution would probably fit the bill? 

I believe that advisers have worked out that even though solutions may have the same risk-rating, they can behave very differently in varying market conditions.

In turn, this then leads them to recommend a ‘portfolio’ of risk-rated solutions - seeking to increase diversity and potentially reduce volatility.

To think this through, let’s look at how solutions are risk-rated by firms, such as Defaqto.

Different firms take slightly differing approaches.

However, generally, the risk assessment is undertaken based on the underlying asset allocation of the solution and an assessment of how the asset classes will behave in the future, from a risk/volatility perspective.

Capital Market Assumptions

To help with the assessment, capital market assumptions (CMAs) are used.

At Defaqto, we outsource our CMAs to a third-party organisation (Moodys Analytics) and it provides us with an expected level of annualised volatility, together with an expected return, for each asset class within our risk scheme. 

We then apply these to the asset allocations (both strategic and tactical), that we get directly from the fund manager, to get an overall expected level of volatility for the solution.

CPD
Approx.30min

Please answer the six multiple choice questions below in order to bank your CPD. Multiple attempts are available until all questions are correctly answered.

  1. Why are advisers coming up with two or three risk rated solutions for one investment recommendation?

  2. How does Defaqto calculate its capital market return?

  3. The expected volatility is driving the risk-rating, true or false?

  4. It is OK for advisers to mix and match risk-rated solutions and risk schemes, true or false?

  5. When does recommending several multi-asset solutions to increase diversity work?

  6. What is creating portfolios that use a range of several multi-asset solutions?

Nearly There…

You have successfully answered all the questions correctly, well done!

You should now know…

  • Describe new ways of building multi-asset portfolios
  • Describe the method for calculating the capital market return
  • Identify the ways of achieving true diversity with multi-asset funds

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