Investments  

Appetite for diversification

  • Identify the importance of diversification
  • Describe the way to mitigate risk
  • Describe the role that multi-asset plays in risk mitigation
CPD
Approx.60min
Appetite for diversification

Introduction

Risk is an important part of the multi-asset equation. The reason many investors choose a multi-asset fund is because they like the diversification, and it comes in one package with a single fund manager making the selections.

The point behind selecting a multi-asset fund is that assets that are not necessarily correlated to one another are selected to balance each other out when certain market circumstances prevail.

The advantage for the adviser is that the time taken to select the right asset classes and funds that contain them can be outsourced to an expert fund manager who spends his or her entire time building and managing a fund.

But deciding on the right fund to select is a different challenge.

The most important issue is to assess a client’s attitude to risk, and this is where the fine art of being a financial adviser comes to the fore.

Clients may say they are happy with taking a big risk, but when it comes to testing that, how will they respond to losing a fair amount of money in one day? What other assets do they have to fall back on if they do lose money?

Multi-asset funds are risk-rated by various tech companies to make financial advisers’ lives easier when it comes to making the right selection for their clients.

A number of tools exist to help advisers. Once they have assessed a client’s risk profile, they can access software to select the right match, which has been risk-rated, depending on its constituent parts.

Many advisers find these more useful than the Investment Association mixed asset categorisation, which splits up multi-asset funds based on their equity emphasis.

Therefore, risk and multi-asset are closely bound together.

And so it is important for an adviser to ensure the right selection is made for clients, and that clients fully understands the choices that are taken, based on their risk profile.

Melanie Tringham is features editor at Financial Adviser and FTAdviser.com

In this guide

CPD
Approx.60min

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. At Janus Henderson, it has been found that clients going into multi-asset funds like extreme levels of risk, true or false?

  2. What would happen to a passively focused portfolio?

  3. What is one of the drawbacks with gold?

  4. Which of the following is NOT and advantage of ETFs?

  5. What is a 'core and satellite' approach?

  6. Why is diversification more important than ever right now, according to Justin Inuekwesi?

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

You should now know…

  • Identify the importance of diversification
  • Describe the way to mitigate risk
  • Describe the role that multi-asset plays in risk mitigation

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