How multi-asset became popular
Multi-asset funds have become more popular over the past decade, as investors seek ways to ride out significant fluctuations in global markets.
But there has to be more to choosing a multi-asset fund than a simple need for diversification: cost, suitability and management style are also high on the list of criteria given by advisers as reasons for choosing one fund over another.
By reading this report, you will understand the reasons multi-asset funds have gained in popularity, be able to explore the use of multi-asset funds within a client's overall financial plan and gain an understanding of how anticipated market events might affect investments over the near-term.
CPD: What is driving investor interest and assets into multi-asset products?
Advisers may recall a time when there were only a few providers offering multi-asset funds or ranges, attracting fairly modest assets.
Now, barely a month goes by without a fund group announcing its foray into the multi-asset space, or the addition of a multi-asset product to its existing range.
Within the three IA Mixed Investment sectors, which includes the 0-35% Shares, 20-60% Shares and 40-85% Shares, there are 343 funds, according to a search of FE
This does not include the Flexible or Unclassified sectors, which many multi-asset funds fall into, nor does it include those funds which do not sit in the Investment Association sectors at all.
The sheer volume of funds suggests there is demand and recent figures point to that demand growing.
Multi-asset investments dominated sales in Fidelity’s FundsNetwork in February this year, with the three Mixed Investment sectors claiming the top three spots in its sector sales chart for the month.
It reveals the demand among Isa investors was even greater, with four of the top 10 funds being classified within the Mixed Investment sectors.
The Investment Association’s (IA) February sales figures tell a similar story, as mixed asset was the best-selling asset class in February 2017, with net retail sales of £813m.
Alastair Wainwright, fund market specialist at the IA, says: “Once again our data shows the value that UK investors place on professional asset allocation skills during challenging economic times.
“Mixed asset funds attracted the highest net retail sales in February with the Mixed Investment 40-85% Shares also being the top selling sector.”
Catriona McInally, investment specialist at Prudential UK and Europe, observes: “The growth in the multi-asset sector has been driven by investors’ desire to exert more control over investment risk and looking to vehicles that provide diversification to dampen the effects of market uncertainty.”
The macroeconomic backdrop has certainly pushed investors up the risk scale in order to achieve the same level of return as they were several years ago.
Equities and fixed income alone can no longer meet the return and income needs of many investors, which is where the diversification provided by multi-asset investments comes in.
Trevor Greetham, head of multi-asset at Royal London Asset Management, explains: “Equities have proved themselves a good long-term investment that beats inflation by a wide margin but investors can sometimes face large losses in the short term.
“Bonds are much less volatile but central bank policy has pushed yields to record low levels, so you are leaving a lot of potential return on the table if you invest only in bonds.
“By including both asset classes, multi-asset funds can strike a sensible compromise between risk and return.”
Ms McInally agrees: “Multi-asset products by their very nature invest in a wide range of asset types across the world, providing true diversification.
“This helps to spread investment risk and can offer savers, who are looking for an alternative to cash and who are prepared to take more risk, the opportunity to receive better returns on their investment.”
Multi-asset funds can also seek returns and income from a far wider range of asset classes, with the ability to invest in commodities, property and even more niche assets, which are not correlated with the performance of bonds and equities.
In other words, when bonds and equities experience any downside, alternative assets, such as gold or property, may perform on the upside.
“In addition to all of this, a good tactical asset allocation strategy can make multi-asset funds more than a sum of their parts, adding value over time by moving into or out of different investments as the economic backdrop evolves,” suggests Mr Greetham.
“This aspect appeals to investors who don’t want to manage their own portfolios.”
The evolution of multi-asset products has certainly coincided with an increasing number of advisers choosing to focus on their clients’ financial planning requirements, leaving the stockpicking to the asset allocation experts.
This type of outsourcing is particularly appropriate when advisers have clients who perhaps have less money to invest but want to ensure when it is invested, it is across a range of asset classes.
Investing a client’s hard earned money in a separate equity fund, a fixed income fund and another fund which allocates to commodities, for example, would soon add up in costs and charges, eating away at potential returns.
Ben Willis, head of research at Whitechurch Securities, acknowledges for advisers with clients who have small sums to invest, multi-asset products are a cost efficient way for the adviser to provide investment advice, and for the client to be invested in a diversified mix of assets.
Fund groups have clocked onto this by offering multi-asset funds with different risk levels or targets.
“We have seen multi-asset funds being independently risk rated, which helps to manage clients’ expectations in what they should be expecting from their investment and tick the boxes for the adviser from a suitability perspective,” Mr Willis adds.
Mr Greetham points out the shift to risk-rated funds has been driven primarily by regulatory change in the adviser market since the financial crisis, which has encouraged a shift towards risk-conscious investing on the part of individual investors.
“Multi-asset funds fit the bill as they can offer diversification across a wide range of asset classes tailored to a particular level of risk appetite,” he says.
“Fund providers understand this and multi-asset is now a prime route to market, not just a nice-to-have.”
So the appeal of multi-asset funds is clear and the latest figures indicate there are no signs of the growth of multi-asset abating.
In fact, now that the UK is not only grappling with its departure from the EU, following the triggering of Article 50 but also it will go to the polls on the 8 June after Theresa May called a snap general election, fuelling further investor nervousness.
In short, the markets are only likely to become volatile and unpredictable. This may result in more assets flooding into multi-asset funds and ranges as investors try not to second guess the markets and instead, spread the risk in their portfolios.
Ms McInally notes: “Many commentators are predicting a market downturn in the run-up to Britain’s exit from the European Union.
“Market valuations and geopolitical uncertainties sit at the heart of these concerns, and the announcement of a snap general election in the UK will only add further uncertainty.”
She continues: “In periods of market volatility investors’ focus turns to the investment risk being undertaken and it becomes more important for investors to consider investment products which offer true asset diversification and perhaps those which have the ability to smooth out any large fluctuations in fund prices.”
She forecasts investors will need to look beyond traditional assets and to alternatives in this kind of environment, not only to achieve sustainable investment growth but also to meet any income needs.
As inflation is climbing – it reached 2.3 per cent in February and stayed there in March – savers are even more aware of the effect this has on any money sitting in cash or funds which are not delivering returns.
Multi-asset’s ability to outperform cash and help savers prevent inflation from eating away at their money is proven.
Mr Greetham cites research carried out by Royal London which shows in the last decade, £1,000 invested in a cash Isa is now worth around £900 in terms of what it can buy today. The same amount of money invested in a simple multi-asset fund, however, would be worth around £1,500.
“We expect demand for multi-asset funds to stay strong, with total savings levels in the UK set to increase, against a backdrop of ultra-low interest rates on bank deposits,” Mr Greetham predicts.
Fund groups and platforms are also bringing to market different types of multi-asset funds to meet the changing needs of advisers’ clients, although whether supply is
outstripping demand remains to be seen.
Mr Willis points out among this “newer breed” of multi-asset funds has been the launch of those which also generate an income.
“Diversifying assets also can mean diversifying your income stream and so income focused multi-asset income funds can provide relatively high and sustainable risk-adjusted income returns.
“This also could lead to further demand as long as these relatively new offerings deliver on their target income with the commensurate and appropriate level of risk”, he says.
Ms McInally agrees: “As the multi-asset market grows and develops we are likely to see further diversification within the sector, with a wider range of active, passive and hybrid multi-asset propositions emerging.
“Additionally, we’re seeing an increase in the risk managed multi-asset sector.
“Our latest research among advisers shows that the smoothed multi-asset investment sector is firmly established and that advisers (70 per cent) expect growth to continue or even accelerate.”
In spite of the development of multi-asset funds, there are concerns about whether the multi-asset market has reached saturation point.
As Mr Willis notes, they can be accessed via any major platform now and there are so many variations on the multi-asset theme.
“Furthermore, a number of platform providers have seen that offering their own range of multi-asset funds is a good model for attracting new business, and so now virtually all platform providers offer their own multi-asset solutions.”
He believes the market has become a bit saturated already, with a plethora of independent multi-asset funds available.
“How do you choose which one is most suitable, as there are a lot of funds out there which are very similar in terms of asset breakdown, investment objective and the level of risk they are taking,” he asks.
But Ms McInally predicts multi-asset products, in particular smoothed multi-asset products which had a strong year in 2016, will continue to see demand given the ongoing investment market volatility and low interest rate environment.
There may always be advisers who prefer to make their own asset allocation decisions for clients, and clients who want that service from their adviser.
But for those who are prepared to outsource, for cost or performance reasons, the multi-asset space is providing products to meet most client needs, whether that’s a more cautious approach to deliver slow and steady growth, or higher-risk funds to deliver on income requirements.
Ellie Duncan is deputy content plus editor at FTAdviser.com
View from RLAM:
Smooth operators - the growing popularity of multi-asset funds
Trevor Greetham, head of multi-asset and lead manager of Royal London Asset Management’s Global Multi Asset Portfolio (GMAP) range, provides an overview of key considerations for investors.
The number and range of multi asset funds available has increased dramatically in recent years.
Since their inception, these funds have evolved from simple balanced equity and bond strategies into highly diversified funds.
They are encompassing ever-broader opportunity sets and deploying increasingly sophisticated approaches to asset allocation, including quantitative modelling to improve strategic and tactical decision making.
Multi asset funds are currently enjoying significant inflows, and in this article we look at some of the key reasons behind this increase in interest and investment in this sector.
The aim of most multi asset funds is, broadly speaking, to maximise returns within a given level of risk, using diversification to reduce correlation with any individual asset class and minimise volatility.
The focus on risk-adjusted returns has made multi asset funds a popular choice for pension investors, who are seeking to protect their capital over the long term from the eroding effects of inflation.
Managers use asset allocation to balance risk and return over the long term, based on individual fund objectives and risk tolerance.
Active fund managers also aim to add value by moving money between relatively attractive assets over the short to medium term.
The wide variety of funds available means investors can select a fund that matches their risk appetite and time horizons, and adjust their investments to generate attractive real returns as they approach retirement.
For other individual investors, including Isa investors, who do not have access to bespoke portfolio solutions, multi asset funds offer an easy and relatively low-cost way to achieve a well-diversified portfolio and benefit from active management.
While multi asset funds span a wide risk/return spectrum, the risk tolerance of a typical fund is generally lower than that of an equity fund; multi asset funds are therefore a useful product for financial advisers, who must take into account suitability and outcomes when advising clients.
In an extended period of low rates and very low bond yields that has prevailed since the financial crisis, multi asset funds have also benefited from inflows from bond investors, either as a risk-efficient replacement for their fixed income investments, or as part of an effort to diversify and protect capital against a future rise in yields.
The potential to generate less volatile returns is the real attraction of the multi-asset approach.
Over the last 10 years, asset class returns have varied greatly from year to year and, owing to the myriad geopolitical and economic factors that influence markets, there is no discernible pattern to performance.
Through diversification, multi asset funds can offer smoother returns, while still enabling investors to take advantage of volatility in markets and fluctuations in the performance of individual asset classes, through active asset allocation.
Last year was a year of extraordinary geopolitical surprises, and, even had investors been able to predict the outcomes, market reaction to these events confounded expectations in many cases.
With 2017 set to continue in the same vein, fraught with risk and uncertainty, the fact that multi asset funds continue to attract inflows is no surprise.
The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. For funds that use derivatives, their use may be beneficial, however, they also involve specific risks. Derivatives may alter the economic exposure of a fund over time, causing it to deviate from the performance of the broader market. Sub-investment grade bonds have characteristics which may result in a higher probability of default than investment grade bonds and therefore a higher risk. For more information concerning the risks of investing, please refer to the Prospectus and Key Investor Information Document (KIID).