Multi-asset investing is increasingly billed as the ideal answer to a variety of questions.
From an investment point of view, increasing risk, a paucity of income and volatile markets ought to play to the strengths of multi-asset, while a range of regulatory and demographic developments have left more people hunting for so-called ‘one-stop' solutions. Multi-asset takes many forms, however, and, much like a good sandwich, the ingredients can be mixed to suit a variety of tastes.
The current boom in multi-asset investing has had a variety of drivers. The introduction of the Retail Distribution Review at the start of 2013, for example, has seen many advisers outsourcing part or all of their investment capabilities and multi-asset has proved a popular solution in this regard.
More recently, the liberalisation of the UK pension regime has not only placed greater responsibility on individuals with regard to the long-term management of their finances, it has also brought forth a broader range of drawdown options, in which multi-asset looks poised to play an important role.
There are investment considerations too - not least the way the global financial crisis exposed the flaws in traditional diversification strategies as many supposedly uncorrelated risk assets fell in unison. With the resulting environment of unusual monetary policy affecting the price of risk assets, the world of investment has somehow seemed trickier - again serving to push investors towards multi-asset solutions.
There remain plenty of asset management firms that believe this approach has an elegant simplicity to it, pointing towards the great deal of diversity within bond and equity markets alone and of which active managers can take full advantage. Launched last autumn, the Jupiter Enhanced Distribution fund is a relatively recent entrant within this part of the market.
So, at least, runs the theory although, in practice, the multi-asset universe can sometimes feel as diverse as some of its constituents' portfolios. The vast range of options facing investors and their advisers includes - but is not limited to - multi-manager options, distribution funds, passive vehicles, absolute return offerings and the type of multi-strategy approach adopted by the likes of the £26bn Standard Life Investments Global Absolute Return Strategies or ‘GARS' portfolio.
The traditional approach to multi-asset investing has been that of the balanced fund. Here, a manager starts with a standard asset class breakdown - say, 60% in equities and 40% in bonds - and then, depending on the market environment, tilts the portfolio either side of these allocations. While bonds and equities have historically been the principal building blocks, property and other alternatives can be sprinkled in - in the process, reinforcing the first half of the ‘multi-asset' tag.
Client Outcomes
Increasingly, however, multi-asset managers are suggesting that starting with an asset class split is akin to putting the cart before the horse. "We do not start with indices or asset classes, but with the outcome for the client," says David Jane, head of multi-asset at Miton Asset Management. "We can then look for where opportunities exist to meet that outcome.
"Rather than aiming to be, for example, over or underweight UK equities then, we start with a blank sheet of paper. This means we do not need to answer difficult questions, such as ‘will miners outperform?' - if we cannot find an answer to that, we just will not hold them."
For their part, groups such as Invesco Perpetual, J.P. Morgan Asset Management and Standard Life Investments take a more thematic approach to multi-asset investing. Essentially, this aims to identify significant themes and trends in the prevailing economic and market climate and then find the best securities to take advantage of them.
James Elliot, chief investment officer, multi-asset solutions at J.P. Morgan Asset Management, believes this approach has certain advantages in the current market environment, explaining: "Balanced investing in traditional markets certainly worked quite well in the post-financial crisis years, with the tide lifting all boats.
"But relying on long-only beta to deliver returns through the lurches in today's global markets may not be enough. It will become increasingly necessary to tap into a mix of sophisticated strategies such as relative value, derivatives and dynamic hedging strategies - both to diversify away from less attractive traditional asset classes and to deliver positive returns across both up and down markets."
Elliot believes an approach that taps into the macroeconomic trends driving global capital markets ought to prove more fruitful at a time when the aggregate growth in markets is weak. This type of approach requires deep resources, however, and tends only to be offered by the bigger fund groups.
Some of the newer multi-asset offerings are aiming not so much to do something particularly different as to do what they do very efficiently. Royal London Asset Management (RLAM), for example, has recently launched a range of multi-asset funds under head of asset allocation Trevor Greetham.
These blend active and passive funds into a low-cost solution that boasts an ongoing charges figure of 0.6%. Rob Williams, head of distribution at RLAM, says: "We are not doing innovation for innovation's sake, but looking to deliver a high-quality offering in totality - generating long-term real returns within a tightly-controlled risk framework."
He believes this part of the market is increasingly cost-sensitive, adding: "We have kept costs lower through the inclusion of passive funds, only taking active risk where we believe we can add real value."
Identifying Success
Identifying which of the various approaches to multi-asset has proved more successful is not the most straightforward task, however. For a start, multi-asset funds can be found within a variety of Investment Association (IA) sectors, including the Mixed Investment groupings, Flexible Investment and Targeted Absolute Return and, in practice, fund performance can often depend more on the skill of the manager than the approach.
To pick out the Mixed Investment 20-60% Shares fund grouping as an example, Premier Multi-Asset Distribution has managed to deliver almost twice the sector average performance over the five years to 21 March 2016 - 48.3% versus 24.7%, according to FE Trustnet - from a relatively conventional blend of equities and bonds. At the same time, certain funds with rather more tools at their disposal have done rather less well.
Another important consideration for investors and their advisers is the different ways providers approach volatility - that is to say, the difference between risk-rated and risk-targeting portfolios.
Explaining the difference, Frank Potaczek, head of insight and consulting (investments) at DeFaqto, says: "Risk ratings are generally provided by a rating agency and are based on the information available at the time of the assessment. There is no requirement to keep risk within a target range and a risk rating could change at a subsequent review. Risk ratings are not standardised, so users of these ratings need to be clear on the rating methodology involved."
In contrast, risk-targeting requires a fund manager to stay within a guideline risk range that is normally measured by a volatility band. "This means the manager will normally have to reduce exposure to riskier assets if the upper volatility band is hit, and to add to risk assets if volatility moves to the lower band," says Potaczek. "Asset allocation may therefore be more flexible, which is the main reason why risk-targeted funds are not marketed within the IA's Mixed Investments peer groups."
Ultimately, an investor's preferred multi-asset option - like a preferred sandwich - is likely to be a matter of individual taste. There is little doubt that multi-asset investing is a great idea in theory but the practice will very much depend on who is putting together all the ingredients. - professionaladviser
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