In the face of market uncertainty, cash levels have increased significantly as investors have sought the perceived safety of holding this type of asset. Brooks Macdonald highlights why multi-asset funds offer an effective alternative for advisers’ clients – especially given the battle against inflation.
Putting cash into savings accounts may seem appealing to investors faced with volatile markets. However, maintaining this strategy of leaving cash in accounts that pay lower rates may result in a negative wealth effect over the longer term when the impact of inflation is considered.
The goal of ‘real’ returns
For many investors, inflation is their most important benchmark. Their broad objective is to grow their wealth ahead of inflation and, by doing so, maintain their purchasing power into the future. Consumer price inflation rose to 10.1% in January – a 30-year high and far above the Bank of England’s 2% long-term target.[1]
It is a strange world when investors, whose objectives are to grow their wealth to beat inflation, are comfortable holding increased levels of cash. The Bank of England base rate currently sits at 4.00%[2] and, therefore, is likely to result in the failure to meet this objective over the longer term.[2]
So, now may be a good time to reassess investment options to make cash work harder against the backdrop of inflation and keeping clients’ long-term financial goals on track. Volatility in markets can be disconcerting, but investing, and remaining invested, through the various ‘ups and downs’ tends to be the better option in terms of achieving longer-term investment goals.
As advisers will know, there is a broad range of investment types, of which each have different risk and return characteristics – behaving in different ways, at different times. Rather than concentrating investments in one area, a multi-asset fund can allocate investors’ funds to several different types of investment – spreading the overall risk taken and accessing more sources of potential return to grow wealth. A multi-asset fund can offer investors a diversified portfolio within a pooled fund structure. Here are some key reasons why this type of investment is worth considering for your clients in the current environment:
Benefits of diversification
A multi-asset fund provides the opportunity to access a range of different potential sources of growth and income. This can be beneficial in terms of both spreading risk and accessing more sources of returns.
Given the volatility recent observed in markets, it is understandable that investors may be concerned about how best to ensure the resilience of their portfolios. However, it is important to remember that not all types of investment (or asset classes) behave in the same way at the same time. There are many different asset classes that an investor can choose, each possessing different risk characteristics. To avoid exposure to undue risk, a well-diversified multi-asset fund will invest funds across a variety of these different investment types.
Traditional asset allocation in a multi-asset fund uses a combination of equities, bonds and cash. Depending on the fund, the mix of assets can be extended to also include allocations to other asset classes, such as real estate, infrastructure or commodities. These allocations can complement the traditional bond-equity partnership by offering additional levels of diversification, income and growth.
Active management
Markets don’t move to a timetable – it is not only beneficial to be able to access different asset classes, but also to have the ability to actively adjust the allocations as the environment changes. For example, by changing exposures to certain equity regions, sectors or individual holdings, or by adjusting duration and credit profiles within fixed income.
An actively managed multi-asset fund provides advisers with the opportunity to take advantage of investment opportunities and manage risks as they arise by flexing these allocations on behalf of clients.
Investment range
A multi-asset fund can usually hold a wide range of underlying investments, subject to their regulatory rules. These can include open-ended funds, investment trusts, exchange traded funds or direct investment – providing the fund manager with a broad choice of structures through which to gain investment exposure. This also helps expand the available investment universe, accessing more sources of potential return.
Tax-efficient structure
Capital gains tax (CGT) is the tax on the profit made by an investor when selling something that’s increased in value. A fund is a collective structure – an open[1]ended investment company (OEIC) or unit trust fund, for example – which, in turn, holds all of the different underlying portfolio investments. The collective structure is treated as one investment that is directly held by the client. The changes made by the investment manager to underlying investments held within the collective structure are not subject to CGT and so a potential liability only occurs when the investor sells units of the collective investment itself.
There are various ways in which advisers can help investors who may be able to utilise their annual exemption allowance when investing in this type of portfolio structure. If capital gains are unlikely to arise outside the portfolio, then investing in an OEIC fund, for example, and undertaking switching to utilise the CGT allowance can be extremely tax efficient.[3]
For more information about Brooks MacDonald, click here or email here
Important information
The information in this article does not constitute advice or a recommendation and investment decisions should not be made on the basis of it. This article is for the information of the recipient only and should not be reproduced, copied or made available to others. The price of investments and the income from them may go down as well as up and neither is guaranteed. Investors may not get back the capital they invested. Past performance is not a reliable indicator of future results.
[1] Office for National Statistics
[2] Bank of England
[3] Tax treatment depends on individual circumstances and may be subject to change in the future. Brooks Macdonald does not provide tax advice and independent professional advice should be sought.
About Brooks Macdonald Multi-Asset Funds
We work in partnership with advisers, leveraging the breadth of our global investment expertise to position portfolios for a changing world – taking advantage of the opportunities and managing the risks to help deliver their clients’ long-term investment goals.
A multi-asset fund such as the SVS Brooks Macdonald Blueprint multi-asset fund range or SVS Cornelian Risk Managed Fund range can offer investors a diversified portfolio within a pooled fund structure. If you are interested in finding out more, please contact
