In this opening article of our comprehensive Multi-Asset Fund Insights publication, sponsored by Schroders and produced in partnership with Defaqto, Defaqto’s Fraser Donaldson, Investment Consultant and Mike Turner, Investment Development Consultant, explore how multi-asset investing has evolved and where it’s heading next. In part one below, Fraser and Mike look at the rise of multi-asset and the diversification benefits it brings.
Advisers can download IFA Magazine’s full Multi-Asset Fund Insights publication for deeper analysis and exclusive insights from leading fund managers on navigating today’s multi-asset fund landscape.
Part 1: The rise of multi-asset investing
Multi-asset investing is now firmly embedded in an adviser’s armoury, undoubtedly brought on by the Retail Distribution Review (RDR) of 2012, which amongst other things encouraged advisers to leave the management of a clients’ investment portfolio to the specialists, i.e. the asset management industry.
RDR was pivotal in the growth of multi-asset solutions[JH1] , ushering a greater focus on risk profiling, suitability, and value for money. RDR encouraged advisers to align client risk appetites more explicitly to investment solutions. This was the start of significant growth in the multi-asset investment industry.
Multi-asset investing has been through several decades of mixed reputation and rebranding. Early incarnations included fund of funds, which back in the 1980s were as much vehicles to facilitate double charging as they were a very sound investment proposition. In the 1990s much of the double charging had been eliminated and there seemed to be a gradual rebrand of the proposition to multi-manager.
The early 2000s saw multi-manager investing in the funds world begin to get significant traction. This did not go unnoticed by the discretionary firms and with the catalyst of RDR saw the beginning of a boom in discretionary management services. The regulatory environment over the last 15 years or so, starting with RDR has been a perfect storm for multi-asset investing and the industry has grown significantly. Chart 1 shows the growth in the number of available multi-asset solutions:
Chart 1 show evolution of multi-asset solutions
The benefits of diversification
We all understand that a multi-asset fund or managed portfolio offers investors a diversified approach to investing by combining different asset classes, typically equities, bonds, property, cash, alternatives, commodities and infrastructure, within a single investment solution. One of the key advantages to this approach is risk management through diversification. Of course, different asset classes tend to perform differently under various market conditions, for example, bonds should typically provide stability when equities are volatile.
This brings us to the second big influence of the RDR, in that we were reminded that not all clients have the same attitude to risk and that suitability of investment should be baked into all client recommendations. Defaqto, amongst others, started to risk rate portfolios and funds so that they could be matched to the client’s attitude to risk.
This focus on suitability meant that asset managers begun to expand their ranges of multi-asset solutions. They would offer a range of options each with a different risk profile. Usually with the same underlying holdings, but crucially with different weightings
Holding a mixture of asset classes, reduces the impact of sharp declines in any one market on the overall portfolio. The portfolio or fund chosen should reflect the client’s likely reaction to declines in value and volatility. In simple terms a client with riskier assets reflects their attitude to risk, but crucially there is still diversification there through multiple asset types, different geographies and even currency exposures.
To be continued…
We will be publishing Parts 2, 3 and 4 of Defaqto’s multi-asset analysis separately online in the coming weeks. In the meantime, advisers can access the full details now by downloading the Multi-Asset Fund Insights publication using the link above.
