Multi-asset investing

Making the right move
The importance of asset allocation

To explore the asset class universe, first you need to pick the right vehicle

Multi-asset is one of those generic terms that we all think we understand. It’s only when we look more closely at it that we need to ask what exactly it is.

On the surface, it is a portfolio that invests in more than one (or multi) asset classes. But considering many funds do this anyway – with most portfolios holding some cash, or hedging currency risk, or using a derivatives overlay – what exactly sets these funds apart?

Unsurprisingly, there doesn’t seem to be one clear definition of multi-asset; there are multi-manager multi-asset funds, there are direct multi-asset funds, there are absolute return multi-asset funds and model portfolios and discretionary portfolios that all have a multi-asset mix in order to meet the client’s end goal.

So perhaps we should strip things back to basics and look simply at what the fund invests in. Does it invest in more than one asset class, and what is the exposure to those investments and the overall diversification of the portfolio?

Does the fund have a strong bias to UK equities and the remainder in fixed income, in which case, can this be considered a true multi-asset fund?

If it has 65 per cent of the fund in frontier market equities, 10 per cent in high yield bonds and 5 per cent each in commodities, hedge funds and infrastructure, this is definitely a multi-asset portfolio. But many would suggest it sits at the riskier end of the spectrum, with little or nothing in the way of traditional assets that could be considered potential risk protection.

The basic asset allocation question is a good starting point. By knowing what it is invested in, you have a better chance of judging whether it will deliver what your client wants, be it income, capital growth or a bit of diversification.

But with the pensions reforms in April giving retirees the opportunity to invest their retirement fund as they wish, income – and in particular, income from a multi-asset portfolio – is likely to remain a key focus for the future.

As James de Sausmarez, director and head of investment trusts at Henderson Global Investors, points out: “With this pension change, a lot of advisers will put investors into multi-asset products. Others may just buy straight into investment trusts, for example, for a stable and growing income stream. But investment trusts are becoming more interesting for income investors, and demand is going to grow quite substantially as people come to terms with the pension rules and get a grip of it.”

With the demand for income growing, the need to look beyond the traditional and make use of the wide universe of asset classes has perhaps never been more important. Multi-asset in its various forms has been around for some time, but this may be the start of a new lease of life as a preferred income product for pensioners, if the multi-asset industry can grasp the opportunity.

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Nyree Stewart is features editor at Investment Adviser

Added flexibility does not always guarantee results

As the Bank of England looks set to keep interest rates low well into 2015, and with Europe looking as if a triple-dip recession is likely, it is unsurprising investors are diversifying their portfolios.

Therefore, multi-asset portfolios remain a key component for many investors, as demonstrated by the fact the IMA Mixed Investment 40-85% Shares sector was the third best-selling category in September with net retail sales of £217m.

Overall, the mixed-asset category outsold fixed income, equity and the money market asset classes in September with net retail sales of £100m, outstripped only by property, with net retail sales of £315m, and the miscellaneous ‘other’, according to figures from the Investment Management Association (IMA).

But while multi-asset is remaining popular with investors, the performance of the IMA Mixed Investment sectors may be proving less strong than some might suspect.

For the five years to October 24 2014, the best performing mixed-asset sector was the Mixed Investment 40-85% Shares sector, with an average return of 36.46 per cent. It beat the other three mixed-asset sectors, which comprise Mixed Investment 0-35% Shares, Flexible Investment and Mixed Investment 20-60% Shares.

The mixed-asset category outsold fixed income, equity and the money market asset classes in September with net retail sales of £100m

It is perhaps surprising that the Flexible Investment sector, which as the title suggests has more flexibility in its asset allocation, lagged behind slightly with an average return of 34.82 per cent.

But all four of these sectors were outstripped by the performance of the FTSE All-Share index, which delivered a return of 50.92 per cent, according to data from FE Analytics.

On a shorter time frame, however, the results are almost reversed.

For the year to date to October 24, the FTSE All-Share index sinks to the bottom of the pack with a loss of 2.54 per cent, while the seemingly more cautious Mixed Investment 0-35% Shares sector topped the list with an average return of 2.42 per cent.

A result that is not surprising given the macro and geopolitical turmoil so far this year.

But returns within the mixed investment sectors for the year to date to October 24 have ranged from a positive 8.16 per cent at the top of the field to a disappointing -8.62 per cent at the bottom of the scale.

This clearly demonstrates that while these funds are often placed within the same sector, this doesn’t mean they will always deliver the same returns.

Multi-asset is designed to give investors added flexibility – they should just be aware that this doesn’t always mean the result will be a positive one.

Nyree Stewart is features editor of Investment Adviser

Elections and stress tests could spook markets

Geopolitical strife and uncertainty has certainly been the watchword of this year so far.

And while the macroeconomic environment does not always have an immediate effect on investments, in a multi-asset portfolio, it can be difficult to ignore.

In the emerging markets it has been the election year, with the most recent result coming from Brazil as Dilma Rousseff scored a perhaps unexpected victory to remain in power, with a 51.6 per cent share of the vote.

The result may not have as much of an impact in terms of reform as the Indian and Indonesian elections earlier this year.

However, the result could see some much-anticipated changes start to filter through in the Bric (Brazil, Russia, India and China) country, given the widely publicised support for Ms Rousseff’s opponent, Aécio Neves, who was seen as the more business-friendly candidate.

But in the developed world, the biggest issue has once again become Europe.

While it is not quite as serious as the sovereign debt crisis of a few years ago, the slowdown in economies across the region, including Germany, has raised fears of a triple-dip recession.

In addition, the recent results of the European banking stress tests have not done much to steady the market, in spite of the results being relatively good news, as there are some flaws in the methodology.

We would have liked to have seen the ECB force European banks to raise a large amount of fresh capital

Tom Becket, Psigma Investment Management

Tom Becket, chief investment officer at Psigma Investment Management, explains: “Focussing on the stress tests, we are comfortable that some parts of the macro scenarios they painted were sufficiently strict.

“We would note that elements of the tests were, in fact, harsher than comparable tests carried out in the US earlier this year.

“However, both the fact that the adverse scenario was not the potential ‘Japanese’ episode that is entirely possible, and the end result of claiming that European lenders need to only raise €9.5bn [£7.5bn] of further capital in spite of the threat of a genuinely deflationary period, partially defeats the purpose of the whole practice.

“In simple terms, this was not very stressful. We would have preferred that the European Central Bank [ECB] saw this as a ‘one-off’ opportunity to finally rid the European financial markets of the potential systemic risk caused by major losses at European banks – much as the Americans did so successfully in 2009.”

Mr Becket continues: “We would have liked to have seen the ECB force European banks to raise a large amount of fresh capital, whether it was deemed necessary or not, after the strengthening of their balance sheets already this year.

“Boringly, they have not done this and so the doubts will persist.”

Nyree Stewart is features editor at Investment Adviser

Time for a clearer definition of the term multi-asset investing

Multi-asset investing has become popular in recent years, yet it remains remarkably vague in definition.

This type of investing is clearly not new since balanced portfolios and funds have been around for decades.

Perhaps it was the launch of alternative funds in the mainstream which precipitated the evolution into the multi-asset phenomenon. If so, multi-asset must mean more than just an allocation to bonds and equities.

Within the fund management industry we may find this a scintillating debate. However, do our underlying investors care? We suspect not. It is the outcome that matters.

While these debates rumble on in the background, we as an industry struggle to help advisers monitor such funds appropriately.

Should multi-asset funds, for example, be measured against the Standard Life Investments Global Absolute Return Strategies, the CF Ruffer Total Return, the Jupiter Merlin Balanced or the M&G Episode funds?

All four are very different in both structure – combinations of multi-manager and direct – and in approach, and they have a mixture of relative and absolute performance targets.

Some are risk-targeted and some place more emphasis on the return. As in life, we seem to always want to put funds into very distinct boxes.

It could be argued that funds should be bunched by investment objectives, not by investment style.

Ultimately, all of these funds are trying to achieve returns for clients using varying levels of risk, but generally less risk than equity markets.

Why not have three sectors: lower, medium and higher risk?

It hardly sounds like a radical solution, but sometimes the simplest solution is the best – it surely beats the dumping ground that is the IMA Unclassified sector.

It could be argued that funds should be bunched by investment objectives, not by investment style

Lower risk could be volatility up to 7 per cent, medium risk 7 to 11 per cent, and higher risk above 11 per cent across a rolling three-year period.

Yes, volatility is a blunt measure of risk. However, many risk tools in the market do focus on this so it seems like a good place to start.

Certainly, funds could and should be monitored using Sortino and Calmar ratios to identify if capital is placed at risk efficiently. ‘Bear beta’ could be used to monitor a fund’s sensitivity to downside equity markets.

What is key is that quartile rankings, based purely on return, should be discouraged in these sectors.

If a multi-asset fund is targeting inflation, of say 3 per cent, it should be as unconstrained as possible, thus allowing the manager to use all resources to hand.

The fund might only invest in long-only cash investments, or purely express views using derivatives at the other end of the scale.

It could be 100 per cent active or passive, or all points in between.

The total expense ratio could be 0.5 per cent or 2.20 per cent, so long as the manager can justify it. The possibilities are many.

The point is that by putting all these funds into the same sectors, advisers and their clients can focus on the risk-adjusted returns, net of all fees, on an even playing field.

Perhaps then they can identify value over price and the ability of a manager to meet objectives, rather than being distracted by multiple approaches to the same end.

David Coombs is head of multi-asset investments at Rathbones

How to choose the most appropriate fund for clients

Multi-asset funds have become an increasingly popular option with advisers. The drivers have been both push and pull – the regulator has demanded a greater focus on investor outcomes and suitability, while the active industry has sought to provide options less easily replicated by passive funds.

However, the funds come in a multitude of different guises: multi-manager, income-focused and active asset allocation.

How can advisers select the most appropriate fund for their clients?

As with any fund, the starting point will be the client’s objectives – whether they are looking for income or capital growth, or a combination of both, their time horizon and their risk appetite.

From there, these objectives can be matched to the outcome the multi-asset fund is seeking to provide. With most funds, the capital growth, income or inflation targets and the blend of assets they will be using to achieve them is clear.

Multi-asset funds are mostly housed in the mixed-asset sectors, although they will make use of the flexible sectors where funds do not want to be wedded to certain bond/equity constraints. This is increasingly common for risk-targeted funds, such as the Rathbones range, which sits in the IMA Unclassified sector.

There are other considerations, such as whether an investor wants a directly invested portfolio or a multi-manager fund. The latter may be more expensive, but the higher cost may be offset by the ability to leverage other managers’ expertise.

Gavin Haynes, managing director at Whitechurch Securities, says: “We favour the multi-manager approach, believing no asset manager can be the strongest in each individual equity market, let alone each asset class. However, there is inevitably some double charging.”

We favour the multi-manager approach, believing no asset manager can be the strongest in each individual equity market, let alone each asset class

Gavin Haynes, Whitechurch Securities

With all multi-asset funds, the experience and ability of the lead fund manager and their team will be important.

Richard Romer-Lee, managing director, Square Mile Investment Consulting & Research, says that the environment within which the fund works can also play a crucial role.

“We would expect to see an alignment of interests between the managers and the unit holders in the fund(s),” he said.

“It is no coincidence that the Jupiter Merlin funds – one of the, if not the, most successful multi-manager franchises – are [run] within a business that has many successful and experienced fund managers.

“Similarly, the multi-asset funds managed by Newton, Standard Life Investments and Threadneedle all have access to a great many investment teams and ideas. The Schroders multi-manager team is also thriving.”

Investors will also need to consider the use of more complex instruments within the strategy and whether the team has the resources to manage them.

Although most multi-asset funds stick to the core asset classes of equity, fixed income and property and cash, a new breed of fund is increasingly making use of a variety of more esoteric asset classes.

The trailblazer for this new wave was the Standard Life Investments Global Absolute Return Strategies fund. These funds tend to require deeper resources, such as in-house derivatives expertise, than for a standard multi-asset fund.

For multi-asset funds, the decision is different to picking, say, a standard equity fund.

The aim is not necessarily to find the fund that is going to be the best performer, but the fund that is most appropriate for a client’s needs.

Cherry Reynard is a freelance journalist

Striving to ‘smooth investment journey for customers’

Striving to ‘smooth investment journey for customers’

Asset allocation in multi-asset funds can range from traditional bonds and equities, all the way to what might be considered more alternative investments, such as private equity and property.

For many, multi-asset investing should live up to its name and do exactly what it says on the tin, which is to invest in a range of different asset classes.

The continuing popularity of these types of funds is evident in figures from the Investment Management Association (IMA), which show that in August 2014 mixed asset was the second best-selling asset class, with net retail sales of £232m.

In the top-five best-selling IMA sectors in the same month, the IMA Mixed Investment 40-85% Shares sector ranked third, having clocked up net retail sales of £159m. The IMA Mixed Investment 20-60% Shares sector took fifth place with £90m of net retail sales during August.

Mark Rockliffe, head of intermediary sales at Heartwood Investment Management, asserts that many investment companies are jumping on the multi-asset bandwagon and repackaging multi-manager products as multi-asset.

He explains: “You will get a very different opinion from different managers as to what a true multi-asset portfolio and multi-asset fund is.”

He insists that a “purist view” is that multi-asset investing is not just about investing in multiple asset classes.

“It is about investing in a range of products and instruments that are more than just funds. Investors are becoming more discerning in terms of what they expect from a multi-asset portfolio,” he suggests.

There are a number of tools that investors can use to understand how a multi-asset fund is invested, including fund fact sheets and ratings agencies.

You will get a very different opinion from different managers as to what a true multi-asset portfolio and multi-asset fund is

Mark Rockliffe, Heartwood Investment Management

Michael Parsons, head of UK funds sales at J.P. Morgan Asset Management, notes: “Advisers can glean information from most fund management groups’ websites, which should include fund factsheets, portfolio information, details on investment approach and manager philosophy and performance track record.”

He adds that they can also judge the commitment and expertise of fund management groups by the quality of content they provide around investment solutions.

Mr Parsons continues: “It is important to fully understand the asset allocation approach of the multi-asset fund and to assess the resources available to the manager.

“Do they have an experienced investment management team? Is their investment process fully and comprehensively explained? Do they have a robust asset allocation expertise?”

These are some of the questions that advisers and investors may want to have in mind when selecting a multi-asset fund for a portfolio.

Mr Rockliffe considers why an investor would choose a multi-asset fund and their expectations.

“I think in most cases, multi-asset investing is about trying to smooth the investment journey for customers in-keeping with their appetite for risk,” he says. “One of the things that multi-asset investing does is it enables you to capture investment returns from across the world.

“In doing that, if they’re well managed, true multi-asset funds will enable customers to be on the end of a more consistent, perhaps a more predictable range of investment returns and that’s why they’re really popular.”

Therefore, it is the ability to asset allocate that makes these funds so popular among investors – a popularity that looks to be far from waning.

Ellie Duncan is deputy features editor at Investment Adviser

Equities can still generate a premium despite ‘setback’

Multi-asset investors will be keeping a close eye on the outlook for the global equity market on the basis that the majority of multi-asset strategies have exposure to equities.

Keith Wade, chief economist and strategist at Schroders, observes that the equity markets have experienced a “setback” recently, although he insists the asset class can still generate an attractive premium for investors.

“There has been a change in the relationship between the global equity index and sovereign bond yields, from one where both moved in the same direction to one where the two have parted company,” he explains.

“Some see this as setting up a battle between bond and equity markets – falling bond yields are often associated with expectations of weaker growth, which is a bad outcome for corporate earnings and thus equity prices.

“Since global growth expectations have been falling this year, the argument goes that equities will soon start to track bond yields lower, and the correlation between the two will become positive again.”

But he points to Schroders’ seven-year return forecasts, which show equities making single-digit returns and outperforming bonds and cash. “On this basis, absolute returns may not be as high as in the past, but global equity markets still offer a risk premium over bonds on our projections,” he adds.

Scott Spencer, investment manager in F&C Investments’ multi-manager team, reiterates his preference for equities within a multi-asset class portfolio and ranks equities as a stronger asset class than fixed income and property in the long term.

So what is the outlook for equities across regions?

We can see a positive catalyst in Abenomics. We see it as an area of great opportunity to deliver alpha if you pick the right manager

Scott Spencer, F&C Investments

Turning to Europe, Mr Spencer says: “We do think valuations of European equities are attractive, especially against the US and the UK, so we buy into the valuation argument.

“We also think that, unlike the US which is coming to the end of its easing cycle, Europe hasn’t started that yet. We would expect more quantitative easing ahead. However, we’re very aware that it’s quite risky and we haven’t actually seen the European Central Bank do anything yet.”

Mr Spencer is also positive on Japan, where he sees prime minister Shinzo Abe’s reforms, called ‘Abenomics’, prompting investors to consider Japanese equities.

He notes: “We can see a positive catalyst in Abenomics. We see it as an area of great opportunity to deliver alpha if you pick the right manager.”

Closer to home and it looks like there are some jitters around the UK equity market, with the prospect of the general election next year and an interest rate rise looming.

Investment strategist at Russell Investments, Wouter Sturkenboom, elaborates: “Over the last two quarters, we have seen growing confirmation of a more sustainable economic recovery in the UK driven by business investment and employment growth.

“However, we believe that in this environment, Bank of England governor [Mark] Carney is under increasing pressure to launch the first rate hike.

“For this reason, he will begin to slowly but clearly set the scene for this occurrence, which may negatively impact UK market performance.”

But he suggests there will continue to be value in UK equities in the fourth quarter of this year.

Ellie Duncan is deputy features editor at Investment Adviser

Is the ‘safe haven’ asset still worth investing in?

Gold has experienced a rather torrid time in the past 12 months, prompting investors to question the safety of this so-called ‘safe haven’ asset.

According to FE Analytics, in the year to October 28 2014, the S&P GSCI Gold Spot index made a loss of 9.23 per cent.

So is there still a place for gold in a multi-asset investment strategy?
Rasmus Soegaard, portfolio manager, alternatives, at Old Mutual Global Investors, claims that gold is an “inherently bad investment” as the price of this asset is driven by speculation. But he reasons that gold does prop up some multi-asset portfolios.

He observes: “You see some multi-asset investors investing in gold and they will say it’s a risk-off asset – a potential inflation hedge.

“Ultimately, we don’t believe gold has any real utility. What determines its value?” he asks.

“This stands for most commodities, but particularly in the case of gold where there’s no cash flow. Supply is obviously a factor, while demand is clearly a factor, whether it be pure speculation or jewellery demand.”

But Martin Arnold, director of global foreign exchange and commodity strategist at ETF Securities, says: “Gold is recovering alongside rising equity market volatility as a ‘flight to safety’ bid for US Treasuries. Weak data from Germany… underscores the fragile state of the eurozone economy and bolsters the case for further easing from the European Central Bank, which may strengthen demand for gold as a monetary metal.”

You see some multi-asset investors investing in gold and they will say it’s a risk-off asset – a potential inflation hedge

Rasmus Soegaard, Old Mutual Global Investors

He adds: “The precision and timing of a bottom is difficult to predict, but the relative valuations of gold and the precious metals at current levels are quite attractive.

“With gold prices having fallen close to the marginal cost of production and speculative futures market shorts in the metal having risen close to all-time highs, [the] bounce [in early October] could trigger a short-covering rally, helping to sustain momentum in the upward trend.”

It seems that the sentiment towards gold is fairly negative at the moment though, which means it may not be a current feature of many multi-asset portfolios.

Scott Spencer, investment manager in F&C Investments’ multi-manager team, says it does not have any direct exposure to gold. “Longer term, you may use it as a diversifier in your portfolio,” he notes.

“Shorter term, given that we don’t seem to be in an inflation environment. We don’t believe there’s the positive tailwind that would get us excited by the asset class.

“I could see us using it in some environments, but more in an inflation-driven environment than the one we’re in.”

Ellie Duncan is deputy features editor at Investment Adviser

Low interest rates and soaring debts trigger rise in bond prices

The macroeconomic environment has been somewhat unpredictable for fixed income, particularly government bonds, in the past few years.

Ultra-low interest rates across the developed markets, with the European Central Bank making two cuts so far this year to reach 0.05 per cent in September, has meant bond prices have been on the rise.

Meanwhile, the macroeconomic situation in Europe has been gradually getting worse, with the Asset Quality Review and banking stress tests delivering a result that saw 25 banks fail.

Anthony Doyle, investment director within the fixed interest team at M&G Investments, pointed out in a recent post on the Bond Vigilantes blog that this failure did not trigger any kind of upheaval in the bond markets, as the banks that failed were expected to do so.

However, he adds that while the capital shortfall identified by the stress tests was measured at just €7bn (£5.5bn), an amount that seems manageable, the “scary” part of the results could be found in a table identifying the bad debts on the banks’ balance sheets.

“When the European Banking Authority applied its definition of non-performing exposure, rather than the commercial banks’ own internal definitions, bad debts skyrocketed by 18.3 per cent to €879.1bn. This equates to almost 9 per cent of eurozone GDP,” Mr Doyle explains.

“What terrifies us about the bad debt revision is that non-performing loans are a lagging indicator. Things are probably far worse than €879.1bn of write-offs. And with the eurozone possibly sliding into deflation and flirting with recession, we have to wonder whether bad loans will top the €1trn mark in the not-too-distant future.”

These figures combined with the latest Geneva Report shows global total debt-to-GDP ratio, excluding financials, is still growing rather than reducing; with the research suggesting the total debt has increased 38 percentage points to reach 212 per cent in 2013. It points out much of this increasing debt burden has been driven by emerging markets, particularly China, since 2008, but it warns that the lack of deleveraging across the globe is concerning.

What terrifies us about the bad debt revision is that non-performing loans are a lagging indicator

Anthony Doyle, M&G Investments

The report states: “The ongoing poisonous combination of high and rising debt and the slowdown in GDP growth is a source of concern for debt sustainability, as well as for any prospect of sustained global recovery.”

While this may seem a theoretical point, the impact on fixed income investors – should the global recovery continue to stall – could be felt in terms of both prices and yields.

Although Legal & General Investment Management strategist Christopher Jeffery notes that, while the ‘neutral’ or ‘terminal’ interest rates in the US, UK and eurozone have dropped by more than 100 basis points in the past three quarters, this does not necessarily signal a gloomy economic outlook.

He says: “The decline in terminal rates can be seen as the product of rising appetite for savings, declining appetite for investment and portfolio shifts that have favoured debt over equity. The shifts in savings and investment have depressed the cost of capital, but are broadly offsetting in their impact on capital formation and therefore growth at the global level.

“The portfolio shifts reflect demographic pressures in the Organisation for Economic Co-operation and Development and the rise of emerging market investors. These are structural changes in the supply and demand for financial assets, rather than a worrying leading indicator about the economic and market outlook.”

Bonds themselves have a number of fundamental factors on which they can be assessed for inclusion in a portfolio, but in terms of the macro factors that can influence how much value they can provide, it seems the picture remains mixed as we move towards the end of 2014.

Nyree Stewart is features editor at Investment Adviser

Asset class declines on back of Chinese economic slowdown

Commodity prices have been falling predominantly on the back of slowing Chinese growth, as well as other macro factors.

Nevertheless, this asset class is a common feature of multi-asset investment strategies, with managers gaining exposure to commodities either directly or indirectly.

Rasmus Soegaard, portfolio manager, alternatives, at Old Mutual Global Investors, backs the asset class. He says: “In terms of commodities as an opportunity set, we see plenty of opportunities across the spectrum and we believe the multi-asset approach is a good way of getting exposure to commodities.

“We use commodities extensively across our multi-asset portfolios and view them as a real return asset class. We generally believe it’s a decent hedge for unexpected inflation as an asset class.”

But Scott Spencer, investment manager in F&C Investments’ multi-manager team, voices his concerns about the story in China, where slowing growth has come to define the country’s economy.

He explains: “This whole move from investment-driven demand to a more consumer-driven demand, we think has just started to have an impact on commodity prices. You’ve seen it with oil and copper and some of the soft commodities.”

Mr Spencer acknowledges that a Chinese slowdown and the reforms introduced by the government in December last year will help the economy in the longer term. He adds: “I think longer term you will get more sustainable growth out of China, but it’s probably going to be slower growth and that is definitely having an impact on commodity prices.”

We use commodities extensively across our multi-asset portfolios. We view them as a real return asset class

Rasmus Soegaard, Old Mutual Global Investors

Erik Knutzen, chief investment officer, multi-asset class, at Neuberger Berman, notes: “In China, investors are assessing lower expectations for growth in the midst of a property market correction and concerns about a credit bubble.

“And the rising dollar and reduced global growth outlook are sending commodity prices lower, raising concerns around commodity-exporting emerging markets.”

In spite of current negative sentiment around the price of commodities on the back of a rising US dollar and weak Chinese growth, Mr Soegaard sees investors becoming increasingly interested in the asset class.

He points out: “It’s no longer necessarily a space for purists or specialists, the markets have opened up in terms of the way you can access commodities. You can access them through diversified indices, you can access them through more mainstream funds.

“The market, as far as I’m concerned, is opening up, which has also led to ebbs and flows in terms of retail investors.”

Mr Soegaard explains that commodities have a role to play in an inflationary environment. “I think investors have certainly woken up to the fact that commodities can be a good hedge for unexpected inflation – that’s what we’re thinking. So it’s no surprise to see more interest in the asset class.”

Ellie Duncan is deputy features editor at Investment Adviser

Clients eye evolving passive trends

Since the RDR forced costs to the forefront of advisers’ minds, the level of debate regarding passive investing has become, perhaps, disproportionate to those taking a binary stance over whether they invest via passive instruments or not.

Yet one area attracting recent attention is multi-asset passive investing.

Seven Investment Management (7IM) was one of the earlier entrants into this space, launching its Asset Allocated Passive (AAP) range in 2007.

Chris Darbyshire, chief investment officer at the group, says clients are starting to shift away from their traditional multi-manager products, in favour of the AAP funds, and believes this trend will broadly continue.

He explains: “Multi-asset is very different to other models of investment. Asset managers tend to sell on ‘star managers’, whereas with multi-asset you are adding value via the asset classes, so the manager becomes less important.”

While a useful approach in terms of key-man risk, especially at a time when high-profile manager moves are so prevalent, Octopus Investments’ Oliver Wallin believes putting the onus on an individual might expose any cracks in the armour.

The investment director of the company’s multi-manager team says: “You can’t generate alpha because you’re using beta strategies, so you are putting a lot of pressure on the active asset allocation to get enough alpha to cover all your costs and get your client some return.

“Advisers need to be aware that the decisions of that manager are their sole source of alpha, which puts a lot of pressure on that part of the portfolio. As multi-managers looking to diversify and control risk, we think that is an unbalanced level of manager risk.”

Most of the innovation we are seeing right now is in the passive space; it seems to be continually evolving

Chris Darbyshire, 7IM

Legal & General Investments runs a 27-strong team of asset allocators, and so arguably spreads that responsibility. Hugh MacTruong, proposition manager of multi-asset and alternatives at the group, says many of the passive multi-asset ranges borne out of multi-manager specialists will still incur a degree of double charging, something they avoid by having in-house capability. But he says he does not believe in “passive for passive’s sake”.

“Physical property may be a better diversifier than a real estate investment trust [Reit], delivering a better IPD [index] return through the active vehicle. And the Reit may have more equity-like characteristics during market shocks.”

Other asset classes not traditionally accessed passively include certain areas of the high-yield market, where liquidity may raise concerns.

“In an asset class like high yield, tracking becomes more difficult,” Mr MacTruong says. “To avoid blowouts you may be better to have an active manager, because a pure passive vehicle may hold the most indebted company as the largest weighting in a high-yield index.”

He points out that 30 or 40 years ago similar comments may have been made about emerging markets, for example. But as structural changes take place and these markets become more liquid and efficient, tracking becomes more commonplace.

“You might not track frontier markets now, but the market is evolving such that one day it will be more likely,” he adds.

Mr Darbyshire agrees. He prefers trackers to exchange-traded funds in many cases. He trades stock and bond baskets directly and deploys equity futures to avoid trading frictions that can occur with buying direct equities. He is also a strong proponent of the investment trend ‘smart beta’.

“Most of the innovation we are seeing right now is in the passive space; it seems to be continually evolving,” he says.

But in some areas of the market, passive replication is simply not possible. Mr Wallin identifies a major shortcoming as the lack of long/short or “manager-skilled” presence.

He says: “I am looking to build a portfolio from a universe containing all the asset classes available, with no limitations on my access. The biggest holes in many multi-asset offerings seem to be in their alternatives package. That is a weakness from our perspective.”

Sam Shaw is a freelance journalist

True multi-asset funds can access alternative classes

True multi-asset funds can access alternative classes

Even though some investors might consider some mainstream asset classes as alternative, true multi-asset funds can go even further afield.

Infrastructure, for instance, is an asset class that is gaining more and more attention, with the MSCI World Infrastructure index delivering a three-year return of 35.85 per cent to October 29, according to FE Analytics. But technically, it can still be considered an alternative asset class, certainly within the multi-asset structure.

Anthony Gillham, a portfolio manager on the multi-asset team at Old Mutual Global Investors, notes a true multi-asset fund may also access “real assets” such as infrastructure and property, which are “useful alternatives that get to the client goal”.

However, he also points to more niche options, such as hedge fund replication strategies and long-short equities. He notes: “Today, the best multi-asset funds tell you exactly what they’re going to do, what they’re going to achieve and how they’ll align with client goals. They also make a fuller and broader use of the investment universe and alternatives, such as real after-inflation return assets and other types of yield-management techniques.”

Interestingly, another asset class that could start attracting the attention of multi-asset investors, especially post the pension reforms scheduled for April 2015, is investment trusts.

Those approaching retirement and those who have retired may well be advised to buy multi-asset products

James de Sausmarez, Henderson Global Investors

These may be well-known investment vehicles, but James de Sausmarez, director and head of investment trusts at Henderson Global Investors, points out multi-asset managers generally tend towards open-ended vehicles because of the liquidity needed when making asset-allocation changes.

He says: “The time horizon is a key issue for multi-asset managers, but that said I think more multi-asset managers are looking very hard at investment trusts, particularly in the context of the changes to the pensions world.

“Those approaching retirement and those who have retired may well be advised to buy multi-asset products, and in that context they will buy a product they will hold for a long-time horizon,” he explains. “In that context, investment trusts fit very well and they generally provide a stable and growing dividend over time. That is the sort of thing you need in a retirement-type portfolio.”

Investment trusts are already widely used when accessing alternative asset classes, such as renewable energy, infrastructure and private equity, as the closed-ended structure is better suited to investments that need a stable asset base.

Mr de Sausmarez adds: “I think investment trusts have the potential to be more interesting to multi-asset managers in the future as they start to look for stable and growing income streams.”

Nyree Stewart is features editor at Investment Adviser

Funds seek out a better quality set of companies

Multi-asset funds offer investors flexibility to spread risk by investing across a range of asset classes, such as equities, bonds and cash, but also other asset classes such as property or commodities.

Sustainable multi-asset funds are available and they put greater emphasis on incorporating environmental, social and corporate governance (ESG) issues into the investment decisions than their conventional peers.

This is done in a number of ways:

• The traditional and often most common element is basic screening out of no-go areas, such as companies with a poor human rights record or certain sectors such as tobacco.

• Positive screening is when the fund manager actively looks for companies set to benefit from sustainability themes, such as a company producing a technology that enables its customers to reduce their environmental impacts, as well as their ongoing costs.

• Engagement (meeting with companies) is another tool used to challenge companies on the way they manage their interaction with society and the environment. Shareholders are able to use their voting rights to improve corporate management for the benefit of the business, as well as broader society.

The key to implementing a sustainable investment strategy is a well-resourced and knowledgeable team that understands how sustainability challenges will affect companies and reflect these views in the funds.

But ESG issues alone are not enough; assessing companies’ business fundamentals and valuation is still an important aspect for sustainable investment funds.

Multi-asset funds rely on delivering investment returns from two areas: stock selection – individual stocks performing better than the market – and asset allocation, which is the proportion invested in equities, bonds and cash.

The key to implementing a sustainable investment strategy is a well-resourced and knowledgeable team

By investing in more sustainable companies, sustainable funds believe they invest in a better quality set of companies. And there are sustainable funds that deliver similar investment returns to conventional, non-sustainable funds.

The decision on how much to invest in each asset class is made by taking consideration of economic conditions, both in the short and long term, and valuation of the relevant asset classes, both against each other and against their long-term average. Sustainable funds include this element, too.

Some asset classes, such as commodities and commercial property, are underserved by sustainable funds. However, the equity and corporate bond components in sustainable funds tend to get exposure to these asset classes, so some diversification benefits take place within these assets.

The overall diversification and volatility exposure, relative to mainstream peers, tends to be very much comparable.

It is possible to provide sustainable multi-asset funds that are significantly different from conventional funds, but that broadly reflect clients’ values, at the same time as delivering similar investment returns.

Sustainable funds are often more transparent, allowing investors to see all the companies invested, as well as which sustainable investment themes they are exposed to and how they are engaging with companies to encourage positive change.

Simon Clements is an investment manager and Harriet Parker is an investment analyst, sustainable and responsible investment, at Alliance Trust Investments

Case studies

Investment Adviser’s Ellie Duncan asks a selection of financial advisers whether a multi-asset investment strategy works for three different scenarios

Case study 1

Ms Stone is 34 years old, unmarried and has no children. She is an accountant and owns the two-bedroom flat that she lives in, having bought it three years ago. She earns £40,000 a year and invests 4 per cent of her salary in a matched company pension pot. Ms Stone has just been given a £15,000 lump sum following the death of a relative and wants to invest it with a view to buying another property in around eight years’ time. She has £5,000 saved in a cash Isa and no other investments currently.

Patrick Connolly, certified financial planner, Chase de Vere Independent Financial Advisers: With an investment period of eight years, a decision needs to be made, in conjunction with the client, about whether to invest in risk assets or stick with cash. For non-cash investments, it is important to carefully manage risk as this money will be required at the end of the term. This is best achieved with a multi-asset approach investing in a range of equities, fixed interest, property and potentially alternative assets, which shouldn’t all rise and fall in value together.

Jaskarn Pawar, chartered financial planner, Investor Profile: A multi-asset solution would be ideal in this situation. Assuming Ms Stone has a healthy cash flow and can afford to invest the money, then choosing a suitable solution that is matched to her personal needs would work well for her. She could buy access to a variety of funds and underlying investments without the complexity of holding them individually herself.

Aj Somal, chartered financial planner, Aurora Financial Planning: If Ms Stone is looking at an eight-year term, then multi-asset investing would be possible for around £12,000 of the lump sum, with the remaining £3,000 to be used to boost her cash Isa element from £5,000 to £8,000. That would be, in effect, her emergency fund, if she needed access to monies before the eight-year term.

Martin Bamford, managing director, Informed Choice: An eight-year time frame is typically long enough to consider exposing capital to investment risk. A multi-asset investment strategy can help to manage risks as the negative correlation between different asset classes will result in less volatility than backing a single asset class, while still offering the opportunity to beat returns from cash. Before investing, Ms Stone should compare this option with the repayment of any mortgage debt on her flat and might also want to boost the size of her cash savings.

John Stirling, chartered financial planner, Walden Capital: On the surface it appears that Ms Stone is quite well positioned, with a modest pension and a small emergency pot. A multi-asset investment in an Isa, aligned with her attitude to risk, seems like a good choice, but she needs to be aware that no one can predict the future. If her eight-year plan to invest in property is a definite timed commitment, then any form of asset-backed investment may fail to deliver what she is looking for on the right date.

Case study 2

Mr and Mrs Jones are both in their late 20s and recently married. Mr Jones works as a teacher and earns £29,000 a year, while Mrs Jones is on an annual salary of £31,000 as a marketing manager. They are currently renting and now they have paid off their wedding they would like to start saving to buy a house together, with a view to starting a family in six years or so. They have set up a stocks and shares Isa to start jointly saving into each month and aim to set aside £500 a month between them. Neither of them has any investment experience but they are willing to take some risk.

Patrick Connolly, certified financial planner, Chase de Vere Independent Financial Advisers: As they’re looking to save for a house and potentially to have a family, they should first focus on building cash savings using cash Isas. If they have children sooner they will have money that can be accessed easily without risking encashing investments at what might be the wrong time. It is positive that they are investing into a stocks and shares Isa, and once they have some cash savings can focus on this again. Because they have no investment experience a multi-asset approach would be suitable to help manage risk.

Jaskarn Pawar, chartered financial planner, Investor Profile: Six years is not a very long time frame to consider for long-term investing, but if they are aware of the risks, and can take on the fact that their investments may reduce in value at the point that they want to buy a home, then it is a possibility. Of course, there may be multi-asset solutions with a relatively low-risk profile that can spread their investments very well over a number of lower-risk investments that could offer the potential for a higher return than they can achieve in a savings account.

Aj Somal, chartered financial planner, Aurora Financial Planning: Mr and Mrs Jones should consider using both the cash and stocks/shares elements of a new individual savings account (Nisa). The £500 a month budget can be set aside, with £250 a month going into a cash element, and the other £250 a month going into the stocks and shares element. Although a six-year term is specified, it could be the case the couple may need some funds in three or four years’ time, so the cash Isa element could be used for this short-term purpose and the stocks and shares element for the six-plus years’ objective.

Martin Bamford, managing director, Informed Choice: Any investment risk they take should be minimal with only six years before they want to buy a house together using the funds. A multi-asset investing strategy should limit exposure to equities to no more than 50 per cent of their portfolio at outset, steadily reducing this as they approach the investment goal and moving funds into cash to avoid the consequences of any market crash shortly before they need the capital.

John Stirling, chartered financial planner, Walden Capital: Cost-effective access to multi-asset investment may well provide the type of investment that the Jones’s require. They appear to have some flexibility in their timescale, and are looking to invest monthly, which can reduce the impact of short-term volatility. The potentially high level of diversification in multi-asset investments will reduce their exposure to any one class of investment, which may be a benefit to those with less experience.

Case study 3

Mr Morris is 40 years old and lives alone, having divorced from his wife, with the separation financially finalised. He has two children aged seven and five and would like to start saving some money for when they reach the age of 18. He works as an IT consultant, earning £45,000 and owns the property in which he lives. Mr Morris already has £20,000 of savings in a stocks and shares Isa, which he plans to use to invest in a buy-to-let property as an additional form of income for retirement. He hopes the rental income will bring in approximately £1,000-£1,500 each month.

Patrick Connolly, certified financial planner, Chase de Vere Independent Financial Advisers: For both his stocks and shares Isa and the savings he is planning to make for his children, there is a strong argument for using a multi-asset approach. However, if he is happy with the risks involved, then regular savings over 10 years or more or long-term investments of more than 20 years should be more focused toward equities. As investment sizes grow, or time periods reduce, then a multi-asset strategy becomes more appropriate as capital protection becomes as important as capital growth.

Jaskarn Pawar, chartered financial planner, Investor Profile: Assuming Mr Morris has a good cash flow and some cash set aside as a reserve then investing to build up a pot of money in 11 and 13 years’ time via a multi-asset approach would be well worthwhile. He could choose to take a little more risk if he wants to and perhaps even blend a few different multi-asset strategies to see how these evolve over time.

Aj Somal, chartered financial planner, Aurora Financial Planning: Mr Morris could invest in a multi-asset investment strategy for his children’s savings, as the terms are 11 and 13 years respectively, once the buy-to-let property has been let out and the cost of the mortgage payments and other costs are known. Then the surplus net income from the rental property could be used to fund monthly payments into a stocks and shares Nisa. He should also set aside money for an emergency fund as he is using his existing £20,000 of savings to fund the buy-to-let property.

Martin Bamford, managing director, Informed Choice: With two different investment goals, Mr Morris could use separate multi-asset investment strategies to expose his savings to investment risk, with the aim of achieving better than cash returns. He will benefit from pound cost averaging by investing regularly. Investing the existing value of his Isa portfolio in a range of investment asset classes will help manage risks over the long term. He should consider allocating this portfolio between UK and international equities, fixed interest securities and commercial property funds.

John Stirling, chartered financial planner, Walden Capital: Mr Morris has a clear investment objective, and plenty of time to achieve it. Wide diversification into multi-asset investments provides him with the best opportunity to effectively plan for his children’s future. By further diversifying his personal investments to include residential property, he isn’t removing risk from his investments, but is reducing the likely impact of any one financial shock.

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