Guide to Multi-Asset
How advisers can safely diversify their clients' portfolios
Multi-asset funds have become a central part of advisers' choices for clients, especially in the past few years.
Increased regulation has put greater pressure on advisers' time, and consequently they have less opportunity to build portfolios for their clients. Multi-asset funds are one answer for advisers looking for a way to make their lives easier.
Multi-asset funds come in a variety of asset mixes, with varying emphasis on equities depending on the type of risk level one wants to adopt.
They can also be good in a defensive investment situation, if an investor is struggling to find a way of diversifying away from risky assets or investments that are looking too high in their valuations.
They can be used for a variety of purposes, not least when decumulating one's pension fund, if the client wants to draw down some assets. They can also be a way to start building one's investment portfolio.
This supplement looks at how multi-asset works, and the circumstances in which it can be used.
Melanie Tringham is deputy features editor of Financial Adviser and FTAdviser.com
What role does multi-asset play in client portfolios?
Multi-asset portfolios fulfil a number of roles, such as to gain greater diversification or to target a range of outcomes including income or specific risk profiles.
Unlike traditional investing, a multi-asset approach provides investors with exposure to a much broader range of assets, such as cash, bonds and equities, as well as different sectors, strategies and direct investments.
This means they can also cater for a range of outcomes, from savers planning for retirement to younger generations saving for different goals.
A multi-asset approach provides investors with exposure to a much broader range of assets, such as cash, bonds and equities, as well as different sectors, strategies and direct investments
But what exactly is the multi-asset approach and how do multi-asset products fit into wider client portfolios?
Diversification, income and risk management
Multi-asset portfolios help savers avoid putting all their ‘eggs in one basket’, by diversifying across different investment opportunities seeking to deliver steadier returns, even over shorter holding periods, according to Colin Graham, chief investment officer of multi-asset solutions at Eastspring Investments.
In this way, a multi-asset portfolio not only provides diversification but also offers a core strategy for investment, he continues.
He says: “By including defensive assets, drawdowns can be lowered during market downturns, such as holding government bonds during the 2008 global financial crisis.”
Dominic Byrne, multi-asset investment strategist at BlackRock, suggests advisers might seek to use a conservative multi-asset portfolio to invest cash holdings when there is an absence of strong conviction on a specific asset class.
But there is also a role for advanced multi-asset techniques, wrapped within a single fund, where the manager will seek absolute returns with lower correlation to markets than more directional strategies, he explains.
Mr Byrne continues: “Finally, research into strategic asset allocation has created a number of ways to build core and diversified holdings that target a range of risk levels, this can be done using asset classes or even through factor research to help build better balance across exposures.”
“Looking forward, we can see a role for multi-asset portfolios in the decumulation phase, but this may not always be an income-focused strategy but also using liquid and cost-effective multi-asset funds to navigate markets and facilitate income drawdown.”
But beyond the core portfolio, a multi-asset approach can also be used by fund managers in the target-return sector, says Chris Teschmacher, fund manager of asset allocation at Legal & General Investment Management.
He explains: “By widening the opportunity set beyond equities to include fixed income, currencies and commodities, and allowing both long and short exposures, a fund manager can access a wider range of uncorrelated returns that can have a return stream that is different from a traditional portfolio.”
He added that at the end of the day, most investors are multi-asset investors – whether they choose to invest in models, use discretionary fund managers or outsource to multi-asset solutions.
Multi-asset funds have been a staple in investor portfolios for decades, notes Mark Riggall, head of business development at M&G Prudential Investment Office.
A fund manager can access a wider range of uncorrelated returns that can have a return stream that is different from a traditional portfolio
However, to meet the increased demand for multi-asset solutions today, the sector has evolved, and now provides advisers with a host of funds that help them achieve very specific goals for all or part of a client’s portfolio, he adds.
How has the role of multi-asset changed?
Since the Retail Distribution Review, multi-asset investments have seen an explosion in popularity and have been increasingly used as a core holding within client portfolios, according to Haig Bathgate, head of portfolio management at Seven Investment Management.
He explains: “Multi-asset investments offer advisers and their clients an expertly managed one-stop solution that provides diversification across asset classes, regions and currencies, leaving advisers to focus on the service they provide their clients.”
Similarly, Mr Riggall suggests the arrival of new rules, notably since pensions freedoms, have increased the sector’s importance, with investors requiring more flexible solutions that can provide a regular and steady income.
Multi-asset investments offer advisers and their clients an expertly managed one-stop solution that provides diversification across asset classes, regions and currencies
He says: “The evolution of risk profilers and modelling tools in the retail market has influenced distribution as advisers seek a consistent, auditable and client-specific investment selection process.
“Multi-asset funds remain a natural part of this process, as asset allocation, risk management and stock selection can be outsourced.”
More frequently multi-asset funds are being adopted as suitable options at reasonable costs, points out Russell Lancaster, head of intermediary sales at Fidelity International.
“Interest for this type of range comes from across the spectrum, including those firms looking to outsource entirely, to firms with sophisticated centralised investment propositions in need of a solution for a portion of their client bank.”
He adds: “Given the nature of multi-asset ranges, there is typically greater demand to be expected in the middle of the range, as a greater number of investors will be balanced in their appetite for risk, than at either end of the extremes.”
Another trend had been the proliferation and growth in demand for target risk funds and portfolios, partly driven by the regulatory focus on suitability and transparency, explains John Husselbee, head of multi-asset at Liontrust.
He adds: “Target-risk funds and portfolios enable advisers to identify the most suitable products for their clients by understanding the level of risk the products will be taking, and whether they match their clients’ investment objectives and time horizons.”
Nowadays, clients either look for a low-risk multi-asset solution for their defensive bucket or a high-risk one, and both will then play a specific role in the client’s wider investment portfolio, explains Mr Teschmacher.
He adds: “We [also] witnessed a gradual reduction in the domestic bias, both within the equity or bond allocation, and more and more asset classes have become investible, allowing investors reach out to areas such as infrastructure or frontier markets.”
Where are multi-asset managers finding investment opportunities?
Commodities, catastrophe bonds, structured credit, loans, aircraft leasing, infrastructure and renewable energy; these are all some of the assets that can be found in multi-asset portfolios today.
Vincent McEntegart, co-manager of the Kames Diversified Monthly Income fund, says: “Multi-asset portfolios constructed in this way have generally delivered good outcomes for investors in recent years [while] over three and five-year total return multi-asset funds have delivered higher returns than absolute return multi-asset funds.”
Key tenets of creating multi-asset portfolios are risk conviction levels and the correlations between investment opportunities
But as well as diversification, key tenets of creating multi-asset portfolios are risk conviction levels and the correlations between investment opportunities, adds Colin Graham, chief investment officer of multi-asset solutions at Eastspring Investments.
He says: “For example, geopolitical tensions create anomalies, and the risk priced into investments needs to be assessed – is the risk in the price?”
Indeed, some people are concerned about the increasing correlation between equities and bonds.
Kames Capital’s Mr McEntegart continues that in late September 2018 the fragility of markets was witnessed once again, with US equities falling almost 20 per cent, according to the S&P 500 total return index, by Christmas.
He says: “But it was not all bad news as bonds provided positive returns, as did some of the alternative asset classes.
“The ‘surprise’ in the fourth quarter of 2018 was that [actually] diversification worked.”
Against this backdrop, where are multi-asset fund managers finding asset classes today that provide real diversification?
In the context of geopolitical risk, building resilience should be a key theme for multi-asset portfolios, suggests Dominic Byrne, multi-asset Investment strategist at BlackRock.
He says: “This can be done through traditional diversification, such as adding US treasuries to portfolios, or in more sophisticated ways, such as targeting quality stocks through a style factor strategy.”
While geopolitical risks often pose challenges to investors, they can equally provide opportunities, points out Andrzej Pioch, fund manager of asset allocation at Legal & General Investment Management.
He says: “From Brexit to US President Trump, Catalonia to India, we have found interesting and often idiosyncratic investment opportunities surrounding the political noise.
While geopolitical risks often pose challenges to investors, they can equally provide opportunities
“For example, LGIM invests in Mexico because we believe the president [Andrés Manuel López Obrador] is more of a pragmatist, rather than the wild-eyed ideologue that many investors fear.”
He says: “The fear has pushed down asset prices as investors abandon their holdings, but our conviction in this trade, against the popular sentiment, has been profitable in the past.”
He adds: “We also dislike UK gilts, as we feel yields will most likely rise under a number of likely Brexit scenarios.”
Finally, he suggests there are also opportunities related to a resurgent Chinese economy.
“These investments include Hong Kong-listed shares and metals, mining and resources companies in Europe that benefit from greater Chinese demand,” he says.
And, in terms of diversification, there is a role for absolute return funds in multi-asset portfolios but only as one element: very much a component of a solution rather than the solution itself, adds John Husselbee, head of multi-asset at Liontrust.
He says: “In our portfolios, we have long been bearish on a fixed income and continue to be underweight the asset class, balancing that out using alternative funds.
“This absolute return and bond exposure helped offset weakness from our equity holdings to a small extent in the volatile Q4 of 2018, showing the benefits of diversification in action.”
Emerging markets also have significant upside potential across the capital structure, says James Bateman, chief investment officer of multi-asset at Fidelity International.
He explains: “We are currently overweight equities, as well as hard currency and local currency emerging markets debt.
“Valuations are attractive, and a more dovish Federal Reserve will allow easier EM central bank policy which further supports EM currencies against the US dollar.”
While oil has risen materially it is still well off its multi-year highs reached in 2018, another key boost.
“We are underweight Europe given the weak growth picture; the region’s economic powerhouse, Germany, narrowly avoided recession, while the Italian recession is weighing on sentiment.”
But the most significant asset allocation change to client portfolios over the last 12 months has been rising exposure to infrastructure and alternatives, according to research from Foresight Group published on 23 April.
The study, conducted among 200 intermediaries, found that some 31 per cent of advisers said client portfolios increasingly weighted towards alternatives in the past year, of which infrastructure was the largest beneficiary at11 per cent.
Also, fixed income accounted for the biggest fall in asset class exposure at 16 per cent, with the majority of advisers looking to increase their clients’ allocation to infrastructure over the next few years.
With a ‘lower for longer’ investment outlook predicted, advisers need to look beyond traditional assets, such as equities and fixed income, and seek out less-correlated assets like alternatives to achieve growth and clients’ income needs, says Mark Riggall, head of business development, M&G Prudential Treasury & Investment Office.
He says: “Many alternative assets can be difficult for retail investors to access as they require a high degree of expertise, large amounts of capital and can have long, but often steady, payback periods.”
With a ‘lower for longer’ investment outlook predicted, advisers need to look beyond traditional assets,
Indeed, with global markets becoming more integrated, asset managers need to look a bit further for diversification, adds Mr Pioch.
He explains: “While many still rely on the low correlation between equities and bonds, alternative risk premia offer a new prospect in the world of investing.”
What advisers need to know about multi-asset funds risk levels
Multi-asset funds are increasing in popularity as a diversified approach to investing, amid a volatile geopolitical landscape.
But this means advisers need to know about the risk levels of these funds.
Alex Sumner, portfolio manager at Blackfinch, says: “A multi-asset fund provides investors with a way of accessing multiple underlying asset classes by investing in just one place, as the manager of the multi-asset fund will decide on the split between the different asset classes to ensure that the fund is best placed to deliver its investment objective over time.”
He adds: “When it comes to investing, there are many different asset classes that investors can choose from. These typically include equities, bonds and alternatives suchas property funds and hedge funds.”
James Beaumont, head of advisory and consulting at Dynamic Solutions, identifies three main factors that form a multi-asset fund.
Mr Beaumont says: “For a multi-asset fund or any other fund, it is essential to have three main factors in place: an investment philosophy based on sound economics, a consistent investment process, and a strong investment team of professionals.”
Mr Sumner highlights that a portfolio made up of multiple asset classes will not perform exactly inline with one particular asset class.
“If we were to see a strong rise in equity markets, a multi-asset portfolio will likely not increase at the same rate. This is because it will contain asset classes such as bonds and property funds, which are typically more defensive in nature and do not tend to rise at the pace of equity markets,” he says.
Mr Beaumont says the firm’s flexible multi-asset approach allows for timely asset allocation shifts to respond to changes in economic environments.
Multi-asset funds are designed to achieve specific aims or outcomes, such as target returns, allowable risk tolerance or deliver specific income levels
For instance, in favourable economic periods, this flexible approach focuses on equities and risky assets in order to take advantage of growth potential, he adds.
Conversely, fund managers may reallocate a greater part of funds to less risky assets such as bonds or cash in turbulent times.
Keith Balmer, product specialist in the multi-strategy team at BMO Global Asset Management, says: “Multi-asset funds are designed to achieve specific aims or outcomes, such as target returns, allowable risk tolerance or deliver specific income levels.”
He adds: “This is achieved by allocating capital across multiple asset classes, concentrating on global equities and fixed income and, to a lesser degree, alternative assets or strategies such as property or infrastructure.”
Mr Balmer identifies a variety of approaches to achieve these aims. These are: active asset allocation, stock selection and combination of both.
“We run a range of funds that target specific levels of volatility with an expectation that they will deliver – over the mid to long term – different returns above inflation.”
David Coombs, fund manager at Rathbone Multi-Asset Portfolio Funds, says: “Investors should be aware of positions where low volatility does not always equal low risk – there are many assets that have optically low volatility but this is driven by infrequent and/or subjective valuations rather than the asset actually being low risk.”
Mr Coombs also mentions the following points on volatility:
• Investors should not get into the habit of focusing on the volatility of each line item in their portfolio – this is irrelevant.
• What matters to advisers, and what should matter most to investors, is the overall portfolio volatility and drawdowns.
• If we build a portfolio that offers real diversification, the correlation of the assets will drive the appropriate portfolio volatility.
• If you build a low-risk portfolio only using assets that are low risk you have to ask which part of your portfolio is actually goingto generate the returnsyou need.
What advisers need to know about risk levels
Understanding risk levels
There are a number of things that advisers need to be aware of while using multi-asset funds to get returns for their clients.
Mihir Kapadia, chief executive of Sun Global Investments, says: “Advisers need to look at the detailed asset breakdown on the multi-asset funds in order to assess the suitability for their clients.”
David Vickers, senior portfolio manager for multi-asset solutions at Russell Investments, says that since the UK’s EU referendum, the depreciation of sterling has been a significant windfall for UK investors in funds that own unhedged overseas asset classes.
“A reversal of this trend could erode future gains, meaning that understanding of the forex risk within funds is possibly the most underappreciated risk and should be understood,”he adds.
Heather Owen, financial planner at Quilter Private Client Advisers, agrees.
She says: “It might be that a client has a wide-ranging portfolio already, but you notice there are no global currencies held.
The level of equity is clearly a key indicator of what most would consider traditional risk, bearing in mind risk weightings are different to asset weightings
“In this instance, you might recommend investing in a single-asset global currencies fund to plug the gap and simply add more diversification to the portfolio.”
Mr Vickers adds: “Risk should be looked at holistically and through a different lens. The level of equity is clearly a key indicator of what most would consider traditional risk, bearing in mind risk weightings are different to asset weightings, in so much as in a 50 per cent equity/50 per cent bond portfolio, well over 80 per cent of the risk will be dominated by the 50 per cent equity weight.”
How multi-asset funds can be used to fund retirement
Investors are spoilt for choice on how to access their pension pots thanks to pension freedom rules that came into effect in 2015.
The more flexible rules have paved the way for more investors to use more sophisticated investments such as multi-asset funds, to boost their retirement coffers.
Heather Owen, financial planner at Quilter Private Client Advisers, says: “Isa subscription limits have become more generous in recent years, and now we are seeing that pensions are no longer the only tax wrapper used when saving for retirement.”
She adds: “Whichever tax wrapper an investor selects, multi-asset funds can be a valuable investment solution for pre-retirement planning.”
We are seeing that pensions are no longer the only tax wrapper used when saving for retirement
So how can multi-asset portfolios be used to convert pension savings to retirement income?
Alex Sumner, portfolio manager at Blackfinch, says: “Multi-asset funds are very popular for those clients who are building up their retirement pot, typically referred to as those who are in the accumulation phase of their lives.”
He adds: “The exposure to different asset classes provides a good opportunity for capital growth during different market cycles which, over time, can generate attractive returns.”
Decumulation is the process by which pension funds are converted into retirement income. This differs from pensions accumulation, which involves building up pension pots through various means, including auto-enrolment.
James Beaumont, head of advisory and consulting at Dynamic Solutions, says: “In light of [using multi-asset portfolios] for funding retirement, larger exposures to growth assets and a higher risk and return is a focus for many.
The exposure to different asset classes provides a good opportunity for capital growth during different market cycles which, over time, can generate attractive returns
“Reversely, when investors retire and their investment horizon shortens, risk is often decreased and a larger emphasis is placed on generating cash flows,” adds Mr Beaumont.
Mr Sumner highlights how most multi-asset funds trade on a daily basis meaning “investors’ capital is never ‘locked in’ for a predefined amount of time”.
“Therefore, if clients are using Isas as part of their retirement strategy then capital can easily be withdrawn at any point should any unforeseen emergencies arise,” he adds.
Mihir Kapadia, chief executive of Sun Global Investments, says: “There are a number of multi-asset products available, focused on giving clients more control over their money.”
These include multi-asset funds, mixed investments (of varying percentage of shares), multi-manager funds and diversified growth funds.
Ms Owen says: “The income fund invests along the same principles as a standard multi-asset fund, but with a preference for assets that are expected to produce fairly reliable natural yields – for example, commercial property with a stable rental income, bonds that pay coupons, stocks that are expected to pay dividends.”