Spred the risk for steady returns
Multi-asset funds are all the rage. But are they any good?
Saturday 21 February 2009
Any financial adviser worth their salt will tell you that the key to achieving a steady long-term return on your investments – without |taking too much of a risk – is diversification. Investing all your money in one company’s shares, for example, could see you lose everything in one go if that business was to go bust. But, by spreading assets across two companies’ shares, you can take comfort from the fact that if one went under, you would still have the money you invested in the other.
The more you diversify, the more you reduce the risk in your portfolio, and by spreading your money across different stocks, as well as different asset classes – such as bonds, property, commodities and cash, which all move in different cycles – you can lower the risk even further, while still preserving the potential to achieve decent returns.
The tricky part, however, is deciding how much to allocate to each type of asset. If you had put most of your money in stocks and shares, property or commodities over the last year, you would have seen significant losses in your portfolio. Only if you’d allocated more heavily towards cash and government bonds would you be likely to have achieved a positive return.
Traditionally, investors have either ignored the relevance of asset allocation or relied on a financial adviser to make these decisions for them. But while some advisers have the knowledge and skill to actively manage their clients’ portfolios, many opt for a straightforward combination of bonds and equities – allocating a higher proportion to equities for those who claim they have a greater appetite for risk, or a higher proportion to bonds for those who prioritise capital preservation.
In recent years, however, a change in the financial regulations has begun to make it easier for individual investment funds to provide a much more complex and dynamic asset allocation all in one product. These so-called “multi-asset funds” aim to be a one-stop shop for investors, spreading their money across multiple asset classes, some of which would not necessarily be accessible to the average financial adviser. The allocation to each asset is also varied on a daily basis, in a bid to maximise investors’ returns.
So, will this be the answer to all our financial planning needs?
The one-stop shop
Alan Steel, of the financial advisers Alan Steel Asset Management, says he believes multi-asset funds are a great idea but have been relatively disappointing so far in terms of their returns. However, he concedes that there are some notable exceptions – highlighting M&G’s Cautious Multi-Asset fund as one that performed very well over the past year. Over the last 12 months, it has lost only 3.1 per cent of its value, at a time when only a handful of investments have made any positive returns at all.
Steel says that the fund’s manager, David Jane, tells investors that this is a fund he designed for his mother. When the times are good, his mother is happy to only participate in 70 per cent of the market return, but when times are bad she wants her capital protected.
This is ultimately what multi-asset funds strive to do. For investors who are willing to take greater risks with their money in search of greater returns, these are probably not racy enough. But for those who find it hard to see a third or more wiped off the value of their investments in less than 12 months – as has been the case for those who have predominantly invested in equities in the past year – these funds are attractive.
Trevor Greetham is the manager of Fidelity Investments’ Multi-Asset Strategic fund, which invests across five different asset classes – equities, bonds, cash, property and commodities. “The idea is that you’ve got a diversification across assets that behave very differently to each other, which gives you a smoothing effect,” he says. “If the tactical allocation is successful, it can preserve more of your capital when we’re in a scary stage of |the market – as we have been recently.”
Greetham’s fund has a benchmark asset allocation of 40 per cent in bonds, 10 per cent in cash, 5 per cent in property, 35 per cent in stocks and 10 per cent in commodities – but he has the power to vary these weightings up to 10 percentage points either way. At the moment, he has around 60 per cent in bonds and cash, just 2 per cent in commodities, and around 32 per cent in equities.
He says the advantage is that by constantly changing the weightings in his portfolio, he ensures investors are not locked into a defensive fund forever. Instead, Greetham adjusts the portfolio as conditions change.
The difficulty when considering multi-asset funds is that there are many different kinds. While all funds in the IMA’s Balanced Managed and Cautious Managed sectors invest in more than one asset class, most invest only in a combination of bonds, equities and cash. Of those that specifically call themselves “multi-asset funds”, some only invest in these three asset classes, while some take a broader view.
Nick Clay, for example, the manager of Newton Managed fund, invests only across cash, bonds and equities – and believes that this is all the diversification that investors need. He adds that his fund is much more transparent and cheaper, as he picks the individual stocks and bonds himself – rather than buying a range of other funds, like Greetham.
However, Tom McGrath, a fund manager at Apollo Multi-Asset Management, a new company which recently launched two multi-asset funds, disagrees with Clay. His funds are invested across as many as eight different asset classes, including areas as diverse as agricultural plantations and pigs.
Arguing the case for investing across a wider spectrum, McGrath points to modern portfolio theory, devised by Nobel Prize winner Dr Harry Markowitz. “Markowitz proved that the more non-correlated asset classes you use increases your chances of reducing risk and enhancing return,” he says.
McGrath does concede though that there comes a time when the benefits of taking on an additional asset class may be marginal, or even detrimental, to increasing returns. However, he admits that it is not always clear where this point lies. “Is four too few? Is eight too many? Maybe, but it’s good to have the flexibility to extend to that,” he says.
Andrew Wilson, the head of investments at wealth management firm Towry Law, is a strong believer in the benefits of diversification. Yet he points out that funds which have been disciples
of modern portfolio theory have not necessarily always performed that well. “I’ve seen plenty of multi-asset funds that have halved in value over the past year,” he says.
He says that many funds go wrong by trying to make calls on the top or bottom of specific markets – which is almost impossible to get right – while others have made bad decisions on where to invest. Last year, for example, many funds got burnt by taking a hefty exposure to private equity, which plummeted in value.
Wilson believes that |the key to success is picking the right asset classes, and then taking a valuation based approach to |changing weightings in these areas.
The downside to most multi-asset funds is that they work out more expensive than investing in a range of regular funds. Although their headline fees may not appear to be any more expensive, it |is important to find out what their Total Expense Ratio is.
Most multi-asset funds invest in other funds – and this is more expensive than investing in individual stocks or bonds. McGrath admits that if you’ve got the knowhow to build a diverse portfolio yourself – and the discipline to keep rebalancing the weightings as performance changes – you could save yourself money. However, he believes that leaving asset allocation to the professionals – and paying a little more for the service – will produce better returns in the long run.
Multi-asset funds: Are they right for me?
Brian Dennehy, of |the financial advisers Dennehy Weller, is not a fan of multi-asset funds. He believes individual portfolios need to be tailored to individual needs and argues that the concept of a one-stop-shop investment is redundant.
However, Darius McDermott, of the financial advisers Chelsea Financial Services, believes these funds can be a good first investment or core long-term holding. “Obviously if the FTSE 100 rises 30 per cent next year, then the funds aren’t going to do that,” he says. “But last year, when global markets were down around 40 per cent, the funds in this sector that we liked were down 10 to 15 per cent. So they’re not immune to a downturn, but they will help preserve your capital.”
McDermott recommends CF Miton Special Situations and HSBC’s Open Global Return as the two funds he favours in this sector. Alan Steel, of Alan Steel Asset Management, suggests the M&G Cautious Multi-Asset fund.
As ever, if you’re unsure which funds to go for, it’s worthwhile seeking professional financial advice. To find an independent financial adviser in your area, visit www.unbiased.co.uk.
Weekly Money: the personal finance stories you might have missed 27 to 31 July
Have you checked your pension? Make sure you're not sleepwalking into problems later in your life
Top-five practical tips for parents when planning for their child's future university education, tuition fees, and cost of living expenses
The most expensive cities in the world 2015
Five Questions On: GB Energy's new tariff
- 1 Stuart Baggs dies: Apprentice star 'The Brand' found dead aged 27
- 2 Whoopi Goldberg tells Cara Delevingne to suck it up: 'She's not famous. I'M famous'
- 3 Jeremy Clarkson’s Amazon Prime deal to reunite Top Gear trio thumbs nose at the BBC
- 4 Every club should be like Labour – you can’t join as a new member unless you’re already a member
- 5 1000 people played Foo Fighters simultaneously to try and get them to play their city
Yvette Cooper: Our choice is years of Tory rule under Jeremy Corbyn – or a return to a Labour government
Labour leadership contender Jeremy Corbyn says 'we can learn a great deal from Karl Marx'
Is Britain really full up? Are migrants taking our jobs? Leading academic answers the most common anti-immigration claims
Public anger after French sunbather beaten up by gang for wearing a bikini in Reims park
Labour leadership: New poll shows party is now even 'less electable' than under Ed Miliband
While we fixate on Calais, the Home Office is quietly deporting dozens of migrants on 'ghost flights'
iJobs Money & Business
£13000 - £15000 per annum: Recruitment Genius: Are you passionate about custom...
£22000 - £25000 per annum: Recruitment Genius: Main purpose: Under the directi...
£35000 - £37000 per annum + benefits : Ashdown Group: Contracts Manager - City...
£35 - £50k DOE: Guru Careers: A Tax Manager / Accountant (ACA / CA / CTA) is n...
Day In a Page
Set sail for this four-bedroom farmhouse in Cowes. With five acres of land and an indoor pool, this home oozes character. There is even potential to let a one-bedroom annexe.
With five bedrooms, this spacious home offers beautiful gardens and modern interiors - set within the popular market town of Bingley.
A few miles from the seaside at Perranporth, this four-bedroom farmhouse sits amongst nine acres of idyllic grounds - including a lake and two barns used as holiday lets.
In the pretty market town of Bungay, this grade II-listed Mill House is arranged over four floors, offering four bedrooms and three reception areas.
This first-floor flat comes with two bedrooms, an impressive open-plan reception room and two lovely roof terraces.
This five-bedroom home comes with a range of outbuildings including a large barn which could be converted into a self-contained granny-flat or rental.
Moored at Taggs Island and reached via a pretty garden, this two-bedroom houseboat has a vaulted reception room and skylit garden studio - currently a beauty salon.
On the edge of the city, this six-bedroom home comes with an outdoor swimming pool and a large garage block that has annexe potential.
A contemporary house spread over three storeys, this three-bedroom detached home has large sliding doors that open out to the River Quaggy.
Moored in Chelsea's Cheyne Walk, this houseboat offers two double bedrooms and a teak deck that's ideal for al-fresco dining.
This former village bakery, dating back to the 17th century, is now a three-bedroom detached home just a few miles from the East Sussex coast.
On the picturesque Isle of Man, this four-bedroom character home has a ground-floor shop that's currently run as a newsagents and a flat that would make an ideal holiday let.
In a new collection of flats, this first-floor two-bedroom apartment offers ample entertaining space and a prime view of Furze Green from a private balcony.
This three-bedroom stone-built cottage currently trades as the village store with a restaurant in the annexe and family accommodation on the upper floors.
Previously two semi-detached properties, this five-bedroom home is spread over three floors with a large breakfast kitchen, orangery, office and gym on the second floor.
This five-bedroom home enjoys countryside views over the Blyth estuary to Southwold, offering flexible living space with a ground-floor annexe - ideal for use as a holiday let.
Close to the market town of Eye, this four-bedroom detached home offers a double-height living room which takes the place of the original, 19th-century, chapel nave.
Dating back to the 19th century, this four-bedroom home needs modernising. Spanning three storeys, the red-brick house has a fireplace, a small terrace and a cellar.
Just outside of Cambridge, this single-storey home offers three double bedrooms, a living room with vaulted timber ceiling and ladder steps that lead to a mezzanine study area.
This six-bedroom Georgian home is on three floors with open fireplaces, a two oven Aga, an annexe, and cottage gardens with outbuildings and a car barn.
A former coach house, Glebe Farm Stable is now a three-bedroom cottage with a double car barn, an attached office, kennels and an outbuilding that's currently used as a gym.
Located beside an impressive Victorian viaduct, this four-bedroom home has an open-plan living area that is glazed on two sides, with skylights and high ceilings.
A former furniture workshop, this three-bedroom home has high ceilings and painted brick walls, in a village setting only fifteen miles from the coast.
This five-bedroom stone townhouse features a pine staircase and an Inglenuk fireplace, double doors from the lounge give access to an enclosed courtyard.
This five-bedroom, detached home blends traditional and modern design; the sleek kitchen features a gas hob and oven set within an exposed chimney breast.
Capitalise on the fabulous views of Trevone Bay by taking two homes and creating one spacious boutique B&B. Just a cliff-top walk from Padstow.
Surrounded by woodland, this five-bedroom manor house has plenty of outdoor storage space in the form of three converted loose boxes, two smaller outhouses and a woodstore.
This six-bedroom home is set amongst three acres of grounds. Currently a large family home, Clift Hill has potential to make a B&B or countryside retreat, subject to change of use permissions.
This Grade II-listed three-bedroom home is situated on a private road, just a short walk from the sandy beaches of Frinton-on-Sea.
Less than five miles from Malmesbury, this four-bedroom cottage comes with equestrian facilities and gardens that extend to approximately three acres.
Spanning three storeys, this late-Victorian five-bedroom farmhouse is a spacious family home with a modern interior and B&B potential.
With an original church arch, this triplex one-bedroom church conversion has a light, spacious, feel and comes with a secure off-street parking space.
This recently-refurbished three-bedroom home has bi-folding doors that lead out to a decked seating area - ideal for alfresco dining this summer.
Well-located for coastal walks and popular restaurants, this detached four-bedroom home offers views over farmland, to the Solent, the Purbecks and Bournemouth.
If you love high ceilings, school conversions like this one are bang on the money. This two-bedroom flat is minutes from Burgess Park and the foodie haven at Borough Market.
Set within a church conversion in Bermondsey, this two-bedroom maisonette combines existing features, such as original arches and brickwork, with a contemporary finish.
This four-bedroom Edwardian home offers a combination of original features and contemporary design after a renovation by the current owners.
This four-bedroom home offers a vaulted ceiling in a breakfast room that's ideal for summer entertaining with doors that open to the patio and garden.
On the market for the first time in more than 50 years, this six-bedroom home is a project with vast potential - spread over three floors of living space.
Surrounded by rolling countryside, this four-bedroom barn conversion comes with a self-contained, one-bedroom annexe that could serve as an office or a holiday let.
Located near Harrogate town centre, this five-bedroom Victorian terrace is arranged over three storeys while a current study serves as an optional sixth bedroom.
A ground-floor flat in a country house, located a mile from Sway; this two-bedroom home would make an ideal weekend retreat on the edge of the New Forest.
On a popular residential lane in Caterham on the Hill, this four-bedroom family home offers a secluded garden and a convenient location for local schools and public transport.
Just a short walk from Westerham green, this three-bedroom cottage has a light kitchen with exposed brickwork and double doors that lead to a south-facing garden.
In a prime spot opposite the River Thames, this one-bedroom flat has an 18sq ft reception room with glass doors that open out to a private terrace.
Set in the hills above Llanwrda Village, west Wales, this 18th-century three-bedroom farmhouse has holiday-let potential from a separate barn conversion and annexe.
This charming end-of-terrace townhouse is arranged over three floors, with two double bedrooms and a private courtyard garden located at the rear of the property.
Located in the University area, this semi-detached five-bedroom home is arranged over three floors - there's even a rear garden and off-road parking too.
Only a few minutes' drive from the charming town of Marlow, this two-bedroom home sits on the private riverside estate of Harleyford.
This detached four-bedroom home in Middleyard is arranged over two floors, with features that include a wood-burning stove and bespoke oak staircase.