Multi-assetNov 21 2019

How do multi-asset fees stack up?

Supported by
HSBC Global Asset Management
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Supported by
HSBC Global Asset Management
How do multi-asset fees stack up?

If something is greater than the sum of its parts, multi-asset should be well worth a premium.

Gathering ideas and opportunities from an often unconstrained range of sectors and regions should mean these funds can find the best returns.

However, despite their potential, fees are a key issue holding them back from being the best-selling funds for advisers and their clients in the UK.

Single strategy equities and bond funds regularly outsell multi-asset, according to industry figures.  

This problem is ongoing. When the Financial Conduct Authority looked into transparency around fees in 2016, multi-asset was at the top of its list.

Multi-asset's time to shine?

But with no set strategy, it can be hard to benchmark against peers; equally, using so many moving parts makes it hard to see clearly what is going on – and what you are paying for.

However, with a record equity bull run potentially on borrowed time and a huge swathe of high-quality fixed income in negative yield territory, it could be multi-asset’s time to shine.

So what is an adviser to do about fees? The key is to thoroughly understand the multitude of multi-asset options and where savings can be made.

Chris Salih, research analyst at FundCalibre, says fees tended to be higher when funds are multi-manager multi-asset funds – in other words, the manager invests in other people's funds.

“The fees are higher because you are effectively paying for two levels of management: the underlying fund management and then someone pooling those funds together for you, hopefully in an optimal mix,” says Mr Salih.

Multi-asset funds that invest directly in different securities tend to be a bit cheaper as there is no 'double layer', but you are relying on one manager’s good ideas rather than a group of them.

“That said, if they are a little more expensive than a pure equity fund, for example, it is not unreasonable,” Mr Salih says.

“Think about it this way: you need fewer resources and arguably a smaller skill set to invest in just UK equities than you do to invest in equities from all over the world, fixed income, property, commodities and other alternatives.”

Getting it right

This last point is an important factor to consider when researching multi-asset, as getting it right takes time and can cost money – but it is a vital step in the process.

Meike Bliebenicht, senior product specialist in multi-asset at HSBC Global Asset Management, said this decision-making process is the primary driver of every multi-asset portfolio’s risk-return profile.

“The manager should have the opportunity to adjust the asset allocation if needed,” says Ms Bliebenicht. “So, in our view there should be no shortcuts to the portfolio construction – asset allocation should be active.”

But if there are no shortcuts to asset allocation, there are savings to be made elsewhere while retaining exposure to myriad opportunities.

“For example, we can implement our desired asset allocation using passive investment vehicles,” she adds. “These deliver a high degree of confidence of capturing the market returns we are looking for, in a cost-effective manner.”

Mike Deverell, investment manager at Cheshire-based Equilibrium Asset Management, says it is important for advisers to focus on costs as this is the one area within their control.

“We can control risk exposure to a great extent and can influence returns,” says Mr Deverell.

“However, our focus is not purely on cost but on value for money. For example, we have plenty of exposure to passive funds, but will not hesitate to pay more for an active fund if we are convinced it can add value.”

Looking solely at what appears to be the cheapest option may not ultimately ensure the best end result for an investor. Funds can be cheap for a reason, and the same can be true for expensive ones.

That does not mean there is not sometimes room for manoeuvre, though.

“Where we buy active funds, we always make sure we negotiate on fees,” he adds.

“Because we invest in relatively large sizes, we can often achieve discounts over and above even the normal institutional share classes. This is particularly the case where we hold more than one fund with a particular manager.”

Running money internally

The preference at HSBC is to run money internally, so as to avoid high fees that can be attached to some active-managed, third-party strategies.

“This cost saving at asset allocation fulfilment level is then passed through to our clients through the OCF,” explains Ms Bliebenicht.

For Mr Salih, taking some time to examine what is out there reveals some bargains.

“Funds like Premier Diversified Growth, a multi-asset fund that invests directly in assets, is pretty cheap at 0.65 per cent OCF – cheaper than many equity funds in fact,” he says.

“Church House Tenax Absolute Return Strategies sits in the Targeted Absolute Return sector but is basically a multi-asset fund (it doesn't do any shorting) and that has an OCF of 0.77 per cent. Again, not expensive at all.”

He also highlighted Rathbone Strategic Growth Portfolio at 0.66 per cent OCF and M&G Episode Income – the property section invests in property funds, everything else is direct – at 0.8 per cent.

Going forward, however, investors might be in line for even better deals.

“Multi-manager multi-asset funds are increasingly coming under pressure to reduce their charges - some are up to 2 per cent,” says Mr Salih.

“I imagine these prices will come down eventually, especially on the larger funds where economies of scale really mean there is little reason not to pass on savings to investors.”