What next for multi-asset?
By Diane Earnshaw
The multi-asset label covers a diverse and complex range of investment funds and approaches.
The common characteristic is that they deliver a return profile which reduces the risk of investing in those asset classes individually.
Multi-asset fund managers aim to deliver superior returns while balancing the portfolio to ensure that the level of risk being taken is appropriate.
Including asset classes that are not typically correlated to equities can lessen the volatility and drawdown experience for investors when equity markets sell off.
Multi-asset funds can help investors and advisers meet a range of needs and objectives. Returns from multi-asset funds may come in the form of income, capital growth or total return; from a mix of assets including equities, fixed income (both sovereign and corporate), property, commodities, alternative assets and cash. Actively hedging currency exposure can also help investors achieve their intended outcomes.
Newer breed multi-asset funds typically have pre-defined outcomes and risk expectations making them a welcome addition to the multi-asset landscape.
In the 1980s and 1990s things appeared simpler. Investors looking for a diversified portfolio had the choice of with-profits or managed funds. With-profits funds were generally the choice for investors who wanted greater security through perceived guarantees. Managed funds were often selected by those who wanted a bit more control and transparency from their investments.
However, both these approaches ultimately disappointed. With-profits failed to deliver the returns expected. In the early 2000s many policyholders were surprised to learn they were exposed to market risk, as ultimately funds can only pay out what has been earned over the medium to long term. This led to the demise of flows to the sector.
Managed funds carried more equity risk than many investors had appreciated. So-called balanced funds ended up with equity 85 per cent exposure and cautious funds with equity 60 per cent exposure.
In the aftermath of the global financial crisis the Investment Association sought to clarify this misnomer by relabelling the managed fund sectors to more accurately reflect their most significant risk – the equity exposure of the fund. For example, the Balanced Managed sector was re-named Mixed Investment 40-85 per cent Shares.
Post RDR, retail advisers have turned to multi-asset funds as an outsourced solution, while they focus on core financial planning. The outsourced model offers the flexibility to replace underperforming managers while retaining the client.
The IA Mixed Investment sectors include the majority of retail multi-asset funds and the sectors combined include over 500 funds. Demand has grown strongly over recent years; from circa £40bn in 2010 to £145bn in 2018, a 300 per cent increase in a little over eight years.
In April 2017, the IA launched a new Volatility Managed sector for funds that have a primary outcome that is risk targeted. The sector already has £25.1bn, with most of these funds having a multi-asset structure. Many of the funds in the new sector moved from other IA sectors at launch but there have also been many new fund launches – at launch there were 83 funds and now there are 103. The Targeted Absolute Return sector is home to most of the outcome orientated absolute return funds available. This sector was launched in 2007 but has seen enormous growth and today boasts assets under management of £78.6m.
Traditional managed funds, fund of funds, risk targeted funds, outcome focused absolute return strategies, outcome orientated growth and income funds, model portfolio services and with-profits funds all make up a diverse and fluid multi-asset landscape.
There remains a wide range of fees in the sector. Across all the Mixed Investment sectors, the median ongoing charges figure ranges from 1.08 per cent to 1.25 per cent. Distributors have become increasingly aware of investor and regulatory sensitivity around costs. This can be illustrated by the median OCF of the newest IA sector, Volatility Managed, which stands at 0.9 per cent – meaningfully lower than the more established Mixed Investment sectors.
The pressure on costs is unlikely to dissipate any time soon and has led to a swathe of new fund launches using passive funds and Exchange Traded Funds (ETFs). Newer entrants have placed pressure on the traditional multi-manager fund universe which now looks expensive with OCFs of around 1.5 per cent. When adviser and platform fees are added, the total cost to the investor is heavy and puts pressure on multi-manager funds to perform consistently above their other multi-asset peers to justify these costs.
Total cost should be a focus for investors and advisers. With adviser charges typically ranging between 0.75 per cent to 1 per cent and platform charges between 0.2 per cent and 0.4 per cent, it is becoming harder to justify the additional fees of traditional multi-manager funds which sit well above their sector.
We see little reason for the popularity of multi-asset funds and solutions to dissipate anytime soon. The structural drivers supporting their use by advisers and investors seem firmly set.
Square Mile’s characteristics of successful strategies:
Meeting a clients’ suitability requirement
Advisers can only make suitable recommendations if funds are clear about their performance and risk objectives and how they meet those objectives. “Value for money” does not preclude higher-cost offerings, but they must demonstrate superior risk-adjusted returns.
Articulation of an expected risk profile is essential if an investor or adviser is to make a judgment on the investment’s suitability. Advisers retain responsibility for suitability even if they have outsourced investment management.
Investment capability to meet objective
In short, are there enough resources to meet the fund’s ambitions? Do they have enough people to research a range of asset classes successfully? Is this approach diligent and repeatable?
A good and well-defined investment process helps to deliver continuity of approach and anticipated outcome. It should have clear risk controls to ensure that managers do not exceed the remit of their mandate and expose investors to unintended and unexpected risk.
Does the fund remain suitable and is it meeting objectives?
Funds are not static, and multi-asset funds need to be tested against their stated objectives to ensure they remain suitable for clients.
Within the scope of the fund’s mandate, objective and investment approach, funds with flexibility and a wide tool kit have the potential to deliver more consistent returns through time.
Many multi-asset funds launched after the financial crisis in 2008 have arguably yet to be fully tested; many have track records of less than five years.
Diane Earnshaw is head of client relationships at Square Mile Investment Consulting and Research