Multi-assetSep 11 2017

Researching multi-asset funds not as daunting as it appears

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Researching multi-asset funds not as daunting as it appears
Net sales for mixed-asset funds in IA universe

For many, attempting to research the multi-asset space has become a daunting task. The landscape has become increasingly complex from a research perspective, as strategies that were previously the preserve of the complex investor now find their way into retail funds. 

Products that appear to have similar investment objectives straddle different Investment Association sectors. Others have different benchmarks or approaches to portfolio construction, and even volatility expectations. So how do we make sense of such a universe?

Given suitability is the key to matching investment solutions to client needs, one option might be to concentrate the research effort on those multi-asset funds that appear to have the investment outcome objectives, volatility profiles, levels of sophistication or simplicity, and cost most closely aligned with the tolerances of a given client base. 

Researching multi-asset funds requires a different approach dependent upon the investment outcome you are looking for. For example, a pragmatic manager will need to have the appropriate toolkit and track record to be able to demonstrate an ability to defend capital in risk-off markets, and to pick up a good proportion of the market’s return in risk-on conditions. 

In contrast, an absolute return manager might include more permanent hedges in the fund to protect against market volatility, and will need to demonstrate the fund has frequently met return benchmarks over rolling time periods while delivering volatility below the prescribed ceiling.

The proviso here is that market conditions will need to be borne in mind, because a predominantly long-only multi-asset fund will find it difficult to post a positive return if most asset classes fall in tandem.

Managers who seek to deliver a rising stream of income tend to offer greater exposure to equity-type assets than those who seek to generate a consistently high and sustainable level of income. The former will need to be able to point to increasing the fund’s net dividend per share over time, as and when market conditions have allowed, while the latter to having delivered an attractively high and stable dividend income stream.

Volatility-managed vehicles are generally organised as suites of funds, with each offering the prospect of a progressively higher level of volatility and return. Consequently, they ought to be researched as suites rather than as individual funds. When their returns are plotted on a graph, the suite must be able to demonstrate the absence of overlapping rolling downside volatility profiles, as well as an upward sloping risk-reward scatter chart pattern in risk-on markets and a downward sloping pattern in risk-off markets. 

Multi-asset funds have increasingly been viewed as providing investment solutions in recent years, rather than as simply being another fund option. The fact they are being used as a core component, if not in many cases the only component (see page 16), in a client’s portfolio lends weight to this view. 

As such, other factors outside of the investment proposition itself need to be considered. This is important because an appreciation of the non-investment issues can turn what might otherwise be thought of as a good investment proposition into something that becomes ‘a service’ that is valued by both the intermediary and the client. 

Meeting expected investment outcomes while outperforming the closest peer group in risk-adjusted terms in both risk-on and risk-off market conditions is only part of the picture. Finding good levels of support from sales people and the wider organisation, robust risk controls and risk management, and transparent, informative and timely client communication materials all have their part to play in selecting a multi-asset fund.

Paul Ilott is director of multi asset research at Scopic Research

Key figures

598 - Number of funds in the IA Mixed and Flexible sectors

£195bn - Assets under management in Mixed Investment sector funds

21 - Number of multi-asset investment trusts

5.7% - Average discount for the AIC Flexible Investment sector funds