Asset Allocation - Let an Expert Manage Do It For You

How your hard-earned money is allocated among the asset classes, such as shares (or equities), commodities, bonds, listed property, forex and cash, is the main determinant of the returns you will earn. You can make that decision yourself, or you can leave the decisions about asset allocation to a professional. One way of doing the latter is to invest in a multi-asset unit trust fund or structured investment products, where an asset manager decides on an allocation within the constraints imposed by regulation and the fund’s investment mandate.

Multi-asset or unit trust funds or structured investment products invest in a broad range of assets, including shares, bonds, commodities, forex, money market instruments and listed property. The fund managers of multi-asset funds decide which asset classes they believe will produce the best returns, and then, within those classes, which securities will perform the best. Some funds have a fixed, or strategic, allocation to the different asset classes, whereas others change the mix of asset classes in line with their views of how the different classes or securities will perform (tactical allocation).

These funds were designed as long-term investment vehicles for people who wanted to invest pension and retirement money. Although multi-asset funds still aim to maximise capital and income growth over the long term, the funds have diversified over the years and the risk levels now vary considerably.

The decision on whether to invest in structured investments or unit trust funds that invest almost entirely in one asset class or a multi-asset fund, or a combination of the two, depends on your financial circumstances, investment goals, the risk you are prepared to take and how long you will be invested (your investment time horizon).

There are some disadvantages to investing in a multi-asset fund:

• Certain asset classes, sectors of the market or areas of the world perform exceptionally well at certain times. You may not derive the full benefit of this out-performance if you are invested in a multi-asset fund that cannot maximise its exposure to a single asset class, market sector or geographic region.
• Some of the top-performing asset managers offer funds that specialise in certain asset classes only, and you will not benefit from their expertise if you do not invest in single-asset funds.
• Few managers have skills in both asset allocation and the selection of individual securities; therefore, it may be better to invest in a single-asset fund where the manager has to focus only on selecting the securities.

The main problem with making asset allocation decisions yourself is that you do not have the information, expertise or experience to know when to adjust your mix of assets. Unfortunately, most investors make asset allocations based on their emotions, usually fear (when an asset is losing value) or greed (when an asset is gaining value). These reactive decisions are often short-sighted and fail to take into account the sound reasons for remaining invested in an asset or not investing in one.

The manager of a multi-asset fund is in a position to understand how the fund is positioned relative to all the factors that may influence the performance of the asset classes in which the fund is invested, in conjunction with changing market conditions.

Another benefit of multi-asset funds is that, because they are diversified across asset classes, they are less volatile than single-asset funds. Over the long term (at least 10 years), a multi-asset fund can provide you with smoother and better returns than an investment in a single asset.