Multi Asset June 2017  

Why diversification matters for multi-asset investment

This article is part of
How to use multi-asset funds for retirement

Why diversification matters for multi-asset investment

Ultimately, a multi-asset fund that is most useful to clients in both the accumulation and decumulation stages is one that is diversified.

As Eugene Philalithis, portfolio manager of Fidelity Multi-Asset Income, says: “Saving for retirement is clearly a big potential area for multi-asset funds.

“Advisers can use multi-asset funds to provide a tailor-made solution to their client.”

This works in both the saving and the spending stages – and the sort of strategy employed might depend very much on the client, Mr Philalithis says.

For example, he explains that an equity multi-manager fund might be a good choice for younger investors, as they can afford to take higher risks further from retirement, or “advisers can adopt a target-date strategy, where the asset mix is automatically adjusted as the end savings date approaches”, he says.

What’s driving returns?

How the fund works for clients is often down to the choice of underlying asset by the fund manager, and the reasons behind those choices can determine which sort of multi-asset fund might be right for your clients, especially those approaching retirement.

Therefore, one of the first things an adviser should do when considering either putting together a multi-asset portfolio, or especially when outsourcing the multi-asset decision-making to a third-party discretionary fund manager or multi-asset fund manager, is to understand where historic returns have come from.

Bill McQuaker, portfolio manager for the Fidelity Multi-Asset Open Range, says: “It’s very important to look at the track record of multi-asset funds and where returns have come from as it could have done well by being long equities and credit over the past few years, riding on the tails of the bull market.

“But this won’t be any good if they don’t have other sources of return or can protect on the downside in the future. The next few years will be a good test for the multi-asset industry.”

Someone using multi-asset for retirement might not want to be riding the tail of a bull market, preferring more stable, less exciting returns and a fairly predictable income stream.

In their book The Little Book of Market Myths: How to Profit by Avoiding the Investing Mistakes Everyone Else Makes, authors Ken Fisher and Lara Hoffmans hit the nail on the head.

They write: “History is never pristine. The world can be a pretty darn scary place – there’s never a dull moment.

“If you’re waiting until things ‘calm down’ to be invested, you’ll be waiting a long time indeed. And if you didn’t invest during periods of turmoil, you wouldn’t spend much time invested at all."

The point is, none of us can correctly time the markets, let alone predict what markets are doing.