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Could 2016 be the year of the multi-asset fund?

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18 December 2015

David Prosser examines the benefits of multi-asset funds.

Could 2016 be the year of the multi-asset fund? These vehicles have seen interest build in recent times, with pension funds leading the charge towards funds that invest across a number of asset classes – including non-mainstream assets – rather than a single class.

Retail investors and their advisers are increasingly attracted to the concept. The Investment Association already has a standalone sector classification for multi-asset vehicles and the Association of Investment Companies will too from next month, when 10 closed-ended funds are reclassified into a new Flexible Investment sector.

The case for multi-asset is built on the more sophisticated way investors and advisers increasingly think about their investments. Traditionally, fund managers have focused on delivering performance against a benchmark – beating the FTSE 100 Index say; but what most people actually want from their investment is a certain outcome, whether that’s something as general as steady wealth accumulation or as specific as a certain level of income in retirement.

Delivering those outcomes using only one asset class is almost impossible to do on a consistent basis. But by using a spread of asset classes, it is possible to target a particular profile of return. That may be about smoothing volatility or always delivering positive returns, or something else, but the aim is to build a diversified portfolio of assets that delivers what investors need and expect.

In fact, multi-asset investment is nothing new. Pension funds have been running balanced fund mandates for decades – but these have generally consisted only of equities, bonds and, sometimes, cash. The concept today has evolved to include more asset classes – traditional equities and bonds, certainly, but also anything from emerging market debt to infrastructure. Derivative instruments also have a role to play for many funds.

The investment company structure, with its fixed pool of assets, is well-suited to this type of asset allocation approach, especially since some of these asset classes may be illiquid. Managers concerned about inflows and outflows of funds, particularly during periods of market stress, may find it difficult to build the exposures they desire.

It’s important to stress that multi-asset investment is a broad church. The AIC’s new sector defines its funds as “companies whose policy allows them to invest in a range of asset types”. That is bound to encompass funds that are in practice quite different to one another – which is what you’d expect since different funds will have different outcomes in mind as they consider portfolio strategy.

Nevertheless, the Flexible Investment sector brings together multi-asset investment companies under one roof. That makes it simpler for advisers to identify these vehicles and to compare and contrast them with one another, as well as with multi-asset open-ended vehicles.

Still, advisers will need to find new ways of thinking about these funds given that they can be so varied. Performance isn’t easily comparable against a benchmark or sector average – they may need to judge fund managers on different criteria, such as the extent to which they have delivered the targeted outcome, or on the trade-off between risk and return, say.

These aren’t necessarily easy questions, but as the trend towards multi-asset investment continues, they will need to be discussed. The pension freedom reforms, in particular, are likely to be a boost for this asset allocation process, given the increasing complexity of many savers’ needs and goals in their retirement years.