Multi-asset funds — the best of all worlds?

London: The mix and match approach for small investors has gained traction since the financial crisis.

Ask multi-asset fund manager Toby Nangle about his heroes, and one of his answers is surprising: a character from the children’s novel 101 Dalmatians. Mr Nangle is a fan of the dogs’ human companion Mr Dearly, a “wizard of finance” who has “done the government a great service (something to do with getting rid of the National Debt)”.

Mr Nangle’s own ambitions in financial wizardry are more modest, but they form part of a big shift in the way many individual investors interact with the fund management industry.

The Threadneedle manager aims to create products around investors’ specific needs rather than the vagaries of a particular market, using a toolkit of investments ranging from the UK government’s 1932 War Loan — one of the oldest bonds available — to equities to commercial property, inside the same fund.

He is one of a growing breed. Dozens of fund providers including BlackRock, the world’s largest asset manager, Invesco Perpetual and Hermes Investment Management have launched multi-asset products over the past year, amid fierce competition to hire experts in asset allocation — the art of adjusting the proportions of investors’ assets held in different markets to generate returns within specific risk parameters.

What’s behind the rise of multi- asset? Partly it is a product of the industry soul-searching that followed the financial crisis, when many investors were unimpressed to hear their funds had “beaten” their benchmarks by virtue of losing slightly less of their money than the underlying index would have done. This moment forced fund managers to think again about what their customers actually wanted.

“Most clients don’t give a fig about what particular markets have done. They just want to be wealthier at the end of the day than at the start,” says Christopher Nichols, an investment director in Standard Life’s multi- asset team.

John Ventre, head of multi-manager at Old Mutual Global Investors, agrees: “We’re seeing increased demand for investments which think about outcomes rather than beating specific benchmarks.”

They may also have benefited from a final flurry of commission-based sales by financial advisers ahead of the retail distribution review at the end of 2012.

Inflows into UK-based multi-asset funds peaked in 2010, midway between the crisis and the start of RDR. Development of the funds has continued since then, and has also been spurred by a change in outlook among financial advisers, some of whom have realised their expertise lies in knowing their clients’ needs rather than in building portfolios from scratch.

For clients with smaller amounts to invest, a multi-asset fund — sometimes referred to in the industry as a “set-and-forget” product — can provide the core of a portfolio.

Bella Caridade-Ferreira, who runs the research firm Fundscape, says: “The benefits of asset allocation have become clear over the past 10 to 20 years. Before that, everyone was in the UK stock market.”

Jason Hollands, managing director of the investment and financial planning company Tilney Bestinvest, believes this is broadly a positive trend for investors. In the past, he says, “there was a tendency to buy faddish products” ahead of the tax-exempt savings deadline each year.

Expanding toolbox

The idea of multi-asset investing is not new. One predecessor of the multi-asset fund was the “balanced fund”, which held fixed proportions of bonds and equities. Some products, such as those in Vanguard’s ultra low-cost LifeStrategy range, are still close to this model, but they have a more global outlook as UK investors have warmed to the idea of investing outside their home market.

Other providers have expanded their toolbox by creating funds that adjust their proportions of different securities over time, and by including more asset classes such as property, infrastructure, currencies, commodities and derivative overlays.

One type of multi-asset fund is the diversified growth vehicle, which aims for equity-like returns but with lower volatility. Another is the absolute return fund — such as Standard Life’s £22bn Global Absolute Return Strategies fund — which tries to deliver positive returns whatever the market conditions.

Diana Mackay, chief executive of the funds consultancy Mackay Williams, calls these “hedge funds for retail investors”, since they can use derivatives to counteract the potential impact of market falls. But Mr Nichols notes that the risk equation is different: “The hedge funds industry takes a risk budget from clients and tries to maximise returns, but we recognised that what clients wanted was a level of return achieved with as little risk as possible,” he says.

In this area of the market, Laith Khalaf, senior analyst at Hargreaves Lansdown, likes Newton’s £9bn Real Return fund, which celebrated its tenth anniversary this year, and Ruffer’s £3bn Total Return product. Other veteran providers of multi- asset funds include Jupiter Asset Management and F&C.

Simpler, “long-only” multi-asset products rely on a combination of asset allocation and bottom-up selection of securities to generate consistent returns. The managers of Goldman Sachs’ new WealthBuilder range maintain that asset allocation is the biggest driver of performance in a portfolio. But Mr Khalaf, whose employer strongly believes in active management, argues that pure asset allocation cannot replace the techniques involved in choosing individual stocks.

— Financial Times