Time to diversify?

The investment industry likes nothing better than a clever new product it can sell to its customers, ideally at a premium. And right now, multi-asset investment is having its moment, with new launches aimed at both institutional and retail customers. The pitch is that in these uncertain times, exposure to a broad range of asset classes under one roof might be just the thing you need to see you through safely.

There’s nothing wrong with the theory; good diversification has been a mainstay of sound investment for as long as there have been investors. But do we really need fancy new products, however imaginatively they may be named, to reconnect us with this ancient principle? Probably not if you look at a pretty comprehensive survey of multi-asset packages just published by FinalytiQ suggesting that only one in seven have produced superior risk-adjusted returns over the past five years.

Moreover, there is no need for investors to put their faith in these cleverly marketed propositions. If you want multi-asset exposure through a collective investment vehicle, there are more straightforward places to go. Step forward the Flexible Investment sector of the investment companies universe.

The sector was launched almost four years ago, but most of its constituents pre-date this reclassification exercise. The 20 or so investment companies in the sector are a disparate bunch, but they share a common thread: their managers aren’t constrained by a narrow mandate and have much more room to pursue the asset allocation they believe is appropriate for the prevailing conditions. They invest in traditional asset classes but also have the freedom to consider alternative assets, including real estate, commodities, infrastructure and others.

In practice, at any given time you’ll find the funds in the sector have very different portfolios, depending on their managers’ views. Some may be largely invested in equities, while others have much bigger holdings of fixed income assets and even cash. Investors get the active approach to portfolio management they pay for.

If these funds sound deceptively simple, they really are. What you’re getting is a transparent, multi-asset vehicle offering exposure to a broad range of asset classes, the exact mix of which will change over the market cycle. The tricky bit, of course, is that you’re dependent on the fund manager to make the right calls about the market and to position the portfolio accordingly.

Nevertheless, what you see is what you get with these funds. Rather than paying for an elaborate product structure or some sort of fixed investment formula, you get a one-stop-shop for multi-asset investment with easy liquidity through daily dealing and a meaningful performance track record.

Just tread carefully with those performance comparisons. On average, Flexible sector funds have underperformed global stock markets over longer term periods – but that is what you would expect, given that many of them will not have been fully invested in equities for long stretches. Given that these funds seek to deliver diversification, comparisons of their volatility are potentially more insightful – and here they score much more highly.

Clearly, the Flexible sector isn’t the place to be for advisers and investors who want unbridled stock market exposure with an aggressive risk and return profile. But if it’s unconstrained allocation of a multi-asset portfolio you want, these funds may be a better option than newer products with supposedly clever bells and whistles.