James Carthew, QuotedData, discusses the ‘multi-asset approach’.
When buying investment companies, usually the risks and rewards come primarily from investing in a single asset class, and most investment companies invest in equities. However, some employ what is called a multi-asset approach, which involves making investments in a range of different asset classes in addition to equities, such as fixed income, property and alternative assets.
An investment company using this approach will frequently hold some direct investments, usually UK equities but possibly bonds and sometimes global equities, whilst funds may be used to gain exposure to more unusual areas. The balance between the different asset classes within the portfolio reflects the manager’s views on their varying prospects at any given time.
The multi-asset approach can work well because investors have exposure to a range of sources of returns that are less correlated – in other words unlikely to move in the same direction at the same time. While there are no guarantees, the aim is to smooth returns in different market environments.
We’ve seen an increase in demand for multi-asset products already in open-ended funds, but we think that this is likely to be reflected in investment companies too. That’s partly because people are increasingly making their own investment choices, and they can use multi-asset funds as a convenient one-stop shop. It’s also because of recent changes to pension legislation that are encouraging people to remain invested for longer before they buy an annuity.
We don’t recommend funds, but an example of an investment company which specifically states its goal is to achieve attractive returns with markedly lower volatility from a multi-asset portfolio is Seneca Global Income & Growth. This company aims for a return that is at least 3% more than you would get from cash over the longer term, with low volatility and delivering both income and capital growth.
Reflecting this, it sits within the AIC’s Global Equity Income sector and, according to figures from QuotedData, an investment company research house, its current yield is 4.1%, which is the middle of the pack of this peer group. Yield is the most important metric Seneca looks at when making investment decisions and when analysing UK equities, the manager focus on companies’ profitability and dividend paying capacity.
Another investment company which achieves income and growth with lower volatility than its peers is the F&C Managed Portfolio Trust. The company is separated into two pools – income and growth shares and so investors can buy into either or both. The income shares, like Seneca’s, sit in the Global Equity Income sector, whilst the growth shares sit in the Global sector. The attractiveness of the F&C Managed Portfolio was demonstrated when the board of The Cayenne Trust decided to give their shareholders the opportunity to roll over their investment into the company when Cayenne closed its doors last year. Both share classes consistently trade at a premium to net asset value. The yield on the income shares is 4.44%.
The AIC has just launched a Flexible Investment sector, which is a potential home for multi-asset funds. BlackRock Income Strategies (formerly British Assets) is one of the ten companies that has joined the sector and is similar to Seneca Global Income & Growth in that it aims for dividend growth, but also capital preservation.
A quarter of the company’s available assets are invested in bonds. The managers say that, given the focus here is on income generation rather than capital gain, these investments have been made in a highly diversified fashion to ensure that exposure to any particular company is very small at the overall fund level.
According to QuotedData, the yield on the BlackRock Income Strategies is 5.0% and so slightly higher than that of the Seneca (4.1%) and F&C Managed Portfolio’s income shares (4.4%), although looking at risk metrics, the BlackRock company is noticeably more volatile than both of these trusts, with Seneca being the least volatile of the three.
Many global equity markets tend to move in line with each other. As such, investors looking for more stable sources of return may appreciate the benefits of a multi-asset approach. Although pure equity funds may be able to deliver the highest returns over the long term, multi-asset funds are designed to achieve attractive income and growth with lower volatility.