Multi-asset funds (or multiple-asset classes) promise investors good diversification as they can include equities, bonds, property, cash and alternatives – such as oil, gold and inflation-linked government bonds.
By spreading investments across asset classes, these funds provide good protection if markets are volatile – that’s the theory at least.
A Japan or US equity fund is purely invested in shares listed in those countries. A UK corporate bond fund is also restricted where it can invest as too is a sector specific vehicle, for instance, a biotech, natural resources or property fund.
Freedom to manoeuvre
A multi-asset fund by contrast has little constraint on where it can invest either geographically or on a sector basis. It can increase or reduce exposure to an asset class as it sees fit. This might mean bailing out of a over-heated property sector or buying back into equities after a major market correction.
Not surprising then that in uncertain times both politically and economically, (think China slowdown, commodity price slumps and more recently Brexit and Trump) benefits of multi-asset funds became highly attractive to investors.
In 2015, multiple-asset classes took the number one spot in terms of sales (£170bn). Investors saw them as a one-stop solution - that could perform well in all market conditions.
However, it would seem investor confidence in multi-asset funds was rather misplaced during this period. According to data from Morningstar, multi-asset fund annual returns to end of July 2016 were largely in negative territory.
It is worth pointing out that there were few safe havens for investors in 2015/16 with the FTSE ending 2015 in the red and commodities such as oil, gold, platinum, aluminium, copper all seeing significant price falls.
A massive sell-off in the bond market didn’t help matters either. All these markets going down around the same time is certainly not typical.
Neil Mumford, chartered financial planner at Milestone Wealth Management accepts that for a short period multi-asset funds did not show strongly (few funds of any description did). However, he warns against taking a 6-12-month snapshot of performance or to underestimate the value of multi-asset investing.
“Looking at one-year figures in isolation tells you very little. You need to look over a longer time horizon of five years plus. For instance, if you look at the Troy Trojan (multi-asset fund), it has returned 26.9% from end of June 2012 until end of June 2017.
"Over the same time period the Miton Cautious Multi-Asset fund and the Ruffer Total Return fund have returned 23.21% and 36.55% respectively. These are good returns with reduced risk compared to pure equity funds.”
Martin Bamford, chartered financial planner with Informed Choice, takes a similar line. “We would always recommend multi-asset investing, as diversification across the different asset classes is the most effective way to manage risks. Investors who stick to a single investment asset class, such as equities, take a very high level of risk with their money.”
Whether and individual investor builds a portfolio of single asset class funds or chooses a multi-asset fund is usually a case of how involved they wish to be in ongoing investment management.
“If you have the time and expertise, then blending together a number of single-asset class funds offers greater flexibility and usually lower costs. Using a multi-asset fund is often best suited to investors who want to delegate everything to a fund manager,” Bamford explains.
And if investors are to entrust a multi-asset fund manager, how do they identify the best options in a market inundated with fund launches in recent years?
Mumford favours multi-asset funds that have a track record rather than new entrants backed by expensive marketing campaigns but little else.
“You need to be careful when so many funds are introduced that you identify an investment company that has been managing funds in this area for some time. For instance, Trojan’s multi asset fund has been around for 15 years and has averaged around 7% per annum.”
He also namechecks the Premier Multi-Asset Distribution portfolio, the longest running fund in its peer group at 20 years.
Bamford echoes Mumford’s point that there is no substitute for experience. “We tend to favour established multi-asset funds, such as the Jupiter Merlin range which has performed consistently well over time.”
In addition to an experience hand at the helm, Mumford stresses the importance of being clear on the objectives of the fund are and ensuring they are aligned with the investor’s own specific goals.
“Is your priority capital growth or income? Is preservation of capital the priority or are you prepared to be a little more aggressive with your investment? For instance, the Ruffer Total Return fund is more aggressive than the Miton Cautious Multi-Asset fund.”
He warns against some of the more convoluted fund targets. “You see fund providers talk about aiming for CPI plus 6% - it is all very woolly.”
Best of all worlds
The obvious benefit of multi-asset funds is that investment risk is greatly reduced as broad diversification helps minimise downside risk. Equity, bond, property and commodity markets seldom move in the same direction at the same time.
Multi-asset fund managers hands are not tied – so with stock markets high currently, multi-asset fund managers can reduce exposure to equities if they wish. A pure equity fund manager does not have this ‘pick and mix’ option.
But as with any active fund management, the manager needs to make the right calls at the right time, not just in terms of fund or stock selection, but the right mix of assets too.
The majority of long-term investment returns come from asset allocation decisions. Just because a multi-asset fund manager has the freedom to move from one asset class to another doesn’t mean they will do so at the most opportune time.
This is where the fund’s performance credentials over the years come in. Past numbers are no guarantee of strong performance in future but it does indicate an ability to get the portfolio balance right more often than not.