The vast majority of multi-managers concentrate on one asset class. So those who cast their nets further afield are sure to get ahead of the game
With the volatile markets of the last two years colouring all our thinking, and the many uncertainties that still lie ahead, advisers find the temptations of multi-manager funds greater than ever.
How beguiling - to concentrate on spending time with clients and on the more technical side of financial planning (inheritance, pensions, trusts and similar). Meanwhile, with markets difficult and many investors uncertain, why not hand over fund management to multi-managers? After all, they are the pearl divers of the investment world, swimming daily through the oyster beds of the investment industry, picking out the pearls and leaving the grit behind. And so it may be. But as we know, every silver lining has a cloud.
Overwhelmingly, the problem with pearl divers is just that - they only come up with pearls. Diamonds, emeralds, rubies and any other kind of gems and precious stones are off the agenda. And so it is with the vast majority of multi-managers - they focus on just equities, or just bonds, or just property, or, well, that is just about it really.
In consequence, advisers who set out to 'outsource' the investment management for their clients end up retaining the biggest investment management decision of all - which asset classes should the client invest in and in what proportions? In addition, they retain the ongoing responsibility of judging when to modify this asset allocation in the light of changing market conditions across a range of asset classes.
So what to do? By taking their thinking one step further and embracing multi-asset funds, advisers gain the same benefits as those offered by more asset- class-specific multi-manager funds, but with added advantages. Of course, like multi-managers, multi-asset managers can use a wide range of third-party funds and products to create their portfolios. But in addition, they offer the advantage that advisers can outsource the top level of their investment management function - asset allocation - and secure, on behalf of their clients, the benefit of ongoing active fund management across a range of asset classes.
Of course, nothing will ultimately remove the responsibility of advisers for pointing their clients' funds in the right direction. Multi-asset is not a magic wand, and responsibility for appointing a multi-asset manager remains with the adviser. This said, there is now a range of multi-asset approaches available from which advisers can choose.
Why consider this now? Because there are signs that for markets, the worst may be over, and with substantial cash waiting to be invested, the question of what to do with clients' investment funds is ever more pressing. The gems are starting to glitter again. Is now the time to go into equities? To hold back in cash? To choose corporate bonds? Pearls? Diamonds? Emeralds? Rubies?
Or more likely, is now the time to stay diversified, enlist the help of experienced multi-asset managers in rummaging through the jewellery casket and seek controlled advantage from improving sentiment, all at the same time?
There are two approaches to multi-asset - one a structured approach based on clearly defined asset- allocation ranges, the other more conviction driven, using an adaptive form of asset allocation. Both aim to combine assets into something stronger, more enduring and more attractive than a simple multi-manager fund.
The structured method may invest in a variety of asset classes, and each asset class can be managed
within pre-set ranges. These ranges represent maximum and minimum percentages of the funds.
The asset-class ranges are designed to allow the construction and active management of funds which capture the differing long-term risk/return characteristics of a wide range of asset classes. Depending on the objectives of each fund, the ranges can be set at different levels. For example, a more growth-orientated fund might have a higher long-term allocation to equities and private equity, while a more income-orientated fund might have a higher allocation to bonds and other income-producing assets.
With diversification a watchword, ranges can be set for a host of other asset classes, each with its own characteristics. This gives the manager scope to build in a greater degree of diversification than would be apparent in most multi-manager portfolios, and exploit a broader range of investment opportunities.
For example, in addition to UK and overseas equities, gilts, corporate bonds and overseas bonds, these funds might invest in private equity, structured products and alternative assets.
While the asset-class ranges do not have to be a part of the prospectus of the funds in theory, they are likely to be all but set in stone, changing only when the long-term prospects for an asset class are believed to have changed. Within these ranges, the fund managers are free to alter the asset allocation on an ongoing basis.
As with other fund managers, the approach is informed by a range of investment values, for example, a contrarian value style, a focus on returns rather than benchmarks, a top-down approach and a mixture of direct investments and the use of third-party funds and products.
One advantage of this approach is that investors and advisers have a clear view on the parameters of the funds, and therefore have a clear view of how monies are to be invested. At the same time, the ranges leave scope for the fund managers to actively manage the funds in keeping with their objectives.
Conversely, the more conviction-based method is both different and complementary to the structured method. This approach encompasses a similarly broad range of asset classes.
Within the context of the aims and objectives of these funds, and the regulatory and IMA framework, the fund managers have complete flexibility to avoid unfavourable (disliked) markets and the freedom to overweight esoteric areas as these are appropriate.
These managers believe adaptive asset allocation is key to successful long-term investment as different asset classes suit different stages of the cycle.
The process focuses on making money, generating absolute returns and, where appropriate to the fund, defending against downside loss. The managers actively respond to changing conditions on an essentially unconstrained basis, believing inefficiencies between markets exist and will persist for fundamental reasons.
Tactical asset allocation enables managers to capitalise on investment opportunities that occur as a result of market timing. Tactical decision making is at the heart of the philosophy, both in making investments and, when they have run their course, further rebalancing the portfolios.
As can be seen, multi-asset investing comes in a range of forms - by no means exhausted by the examples above. It carries a number of advantages over multi-manager, but the principal one is the opportunity it gives fund managers to invest across a range of asset classes. Hence, investors enjoy the possibility of a broader opportunity set, and greater diversification.
Pearls can be cast before swine, but as Zsa Zsa Gabor said: "Pearls are for tears, but diamonds are forever."
