How to use a multi-asset fund in a portfolio

Multi-asset funds offer investors the opportunity to access various themes and assets via one umbrella vehicle. But beyond diversification alone, what can multi-asset funds add to an investment portfolio and how is this structure coping with competition from model portfolios and lifestyle strategies?

Having read this article, you will have improved your understanding of how multi-asset funds are managed and their key attributes. You will also have greater knowledge of conditions when muti-asset funds may out and underperform, how they have evolved in the face of competition from model portfolios and passive offerings, and the role they can play in wider investment portfolio.

30 minutes of CPD include:

Article: 13 mins
Related learning video: 9 minutes
Related learning article: 4 mins
Quiz: 5 mins

What are the key benefits of multi-asset?

Diversification is typically at the forefront of an investor’s mind when considering a multi-asset fund. The structure’s unique open architecture allows for myriad asset classes, themes, and vehicles to be explored, all under one roof, and, in theory, cushions against individual market volatility.

But beyond this virtue alone, why else should an investor consider a multi-asset approach?

The team behind the M&G Episode Income fund, headed by fund manager Steven Andrew, feel that the structure’s benefits stretch much further: “As noted, diversification is the clearest benefit of a multi-asset fund but should be considered not only as diversification for diversification’s sake but more importantly in terms of diversification of sources of income and the diversification of the portfolio in order to generate capital growth.”

The M&G team continued, “Multi-asset investment not only allows a greater range of investments, meaning that more robust income streams can be built but can also protect against downside risk and the potential impairment of capital. Multi-asset investment also provides greater flexibility to actively diversify against particular macroeconomic risks. With the need to preserve purchasing power over time, it is our conviction that a portfolio must generate capital growth. In our opinion, investments focused solely on bond markets are unlikely to provide this, hence the requirement for a multi-asset approach.”

The Premier Miton Multi-Asset Monthly Income team, led by David Hambridge, was keen to point out the structure’s practical benefits: “Over and above the ability to control investment risk, access to (income) opportunities and the ability to manage a diverse income stream, a managed multi-asset solution helps save time and resource for advisers and clients by delivering various client outcomes in a regulated and tax efficient manner,” it said.

Similarly, the Liontrust multi-asset team felt that there were significant advantages to the structure, particularly in terms of accessing investments at wholesale rates – an option that is rarely afforded to the IFA community: “The fund of funds structure can take economies of scale to a new level, facilitating the selection of leading funds in specific sectors that can also be purchased at wholesale rates, and sometimes gain access to investment options beyond those of ordinary investors,” it said. “If a professional manager is managing the fund, the deployment of capital and reactions to market events can be that much more responsive, effective and in line with a disciplined investment process.”

What are the optimal market conditions for a multi-asset fund?

Given the received wisdom regarding diversification, it’s perhaps fair to expect multi-asset funds to perform to a reasonable degree regardless of the market condition. But naturally, there are exceptions to this, and depending on the specificity of the mandate, there are conditions where a multi-asset fund may either outperform or indeed, underperform.

The M&G Episode Income team provided a candid analysis of this: “The flexibility of a multi-asset fund should mean that they’re potentially adaptable to all market environments. The recent rise in yields across all assets is clearly beneficial for income seekers, such as ourselves. The current volatility and dispersion within markets due to changes in macroeconomic policy and geopolitical events should, in our opinion, be beneficial for an active management approach, with the potential to use our expertise in behavioural finance.”

The team continued, “Conversely, the worst environment for our fund was exemplified by 2022 when the need to hold assets and generate income meant that there was nowhere to hide as assets fell in a correlated manner.”

On this point, the Premier Miton Multi-Asset Monthly Income team added, “If markets become driven by a concentrated theme, they may perform less well relatively, but equally our investment process is designed to avoid these distortions and control investment risk on the client’s behalf. Periods of volatility, whilst often unnerving for clients, create excellent opportunities for our investment team to access quality assets at discounted prices.”

How has multi-asset had to evolve, given the competition from the likes of model portfolios or the Vanguard LifeStrategy range?

Price scrutiny is ever present within the financial services industry, and perhaps nowhere more so than in multi-asset funds, where the underlying price of each holding contributes to the fund’s overall cost. As a result, new methods of approaching multi-asset have sprung up, such as model portfolios or ETF ranges, while older, more costly methods of delivering this service, such as fund of funds, have been forced to evolve.

On this, the Premier team said, “One of the key challenges of recent years is how to continue to deliver actively managed and well-diversified funds with true investment integrity from a lower cost base. With this in mind, we have seen the evolution of directly invested and hybrid active/passive funds. For key objectives like income, the cost base is often slightly higher.”

However, not all houses have felt pressurised to reposition their offering, owing to the notion that some investors are happy to pay more for outperformance. The Jupiter Merlin Income Portfolio team, led by John Chatfeild-Roberts, is certainly more disposed to this manner of thinking: “Despite increased competition from various other parties entering the space, we have not changed what we do, continuing to focus on investing in the best active managers we can find, blending them into a portfolio and continually reassessing to ensure that the portfolio is positioned to make the most of the opportunities while aiming to mitigate losses as far as possible.”

What advantages/disadvantages do multi-asset funds have over those types of propositions?

With the battlelines drawn principally around cost, multi-asset funds have a range of weapons within their arsenal from which to remain competitive, as the M&G team highlight: “While there is some merit to a buy-and-hold, low-cost approach in an era of super cheap money, we would argue that this approach is no longer optimal now that markets are beginning to normalise and interest rates rising.

“We would also argue that no one has an edge in attempting to predict market movements over time – a problem that risks seeing many investors consigned to periods of poor performance as they remain in largely static portfolios – and would emphasise the importance of behavioural finance and investor psychology in understanding asset price movements. We believe that the current investment environment lends itself to a multi-asset approach that can take a dynamic and tactical approach.”

Indeed, it is perhaps understandable that during a decade-long bull run, amid super loose monetary policy, tracking the market may have been tantamount to outperformance. But now, with rates likely to remain higher for longer, the environment has changed.

The M&G team concluded, “The herd mentality and periods of capital flight that characterised so much of the post-Covid era was found wanting in the correlated asset class sell-offs last year, highlighting the dangers of an index-led approach. We believe that active multi-asset funds that can offer facets such as a disciplined valuation framework, dynamism, genuine diversification, and investment flexibility will ultimately be rewarded in the current environment.”

Related learning: Face to face with Vincent McEntegart, manager of Aegon Diversified Monthly Income

Has the target market for multi-asset funds evolved in recent years?

Given the range of options now available for investors, it’s only natural that the target market for such funds has developed somewhat, as the Premier Miton team explains: “With retirement income planning, which is now a key subject of discussion for clients and advisers alike, the benefits of a well-managed and diversified income stream are very much in focus.”

The Liontrust team added, “The UK market for multi-asset funds has grown substantially over many years. This growth can be attributed to a widening appreciation of the virtues of multi-asset funds. These virtues can be beneficial for many types of investors, ranging from individual consumers to large institutions.”

What role does a multi-asset fund play within a diversified portfolio?

So, with this in mind, how and when should investors consider using a multi-asset fund? Our contributors were unanimous in that a truly diversified multi-asset offering has the potential to become a core holding within an investment portfolio, leaving the optionality of satellite holdings for funds and themes in which the investor has greater conviction.

The Jupiter Merlin team said, “Multi-manager/multi-asset funds are often used as a one-stop-shop, providing investors with broad exposure across asset classes, the specific risk bucket the investor/adviser chooses, governing their risk and return over time. Others use multi-manager/ multi-asset funds as a core around which satellite exposures are taken as the individual sees fit. They are a very flexible solution.”

In addition, the Liontrust team added, “The benefits of a multi-asset fund, especially its ability to invest across a diverse range of assets using a disciplined investment process, means that it can provide all the attributes required for the ideal core of a portfolio. However, there are multi-asset funds that specialise in certain areas, such as real assets or higher-risk assets. Such funds can be used to complement the core of a portfolio and even provide the ‘satellite’ element if it meets the requirements of an investor.”

An example of such a fund is Brooks Macdonald Defensive Capital. It sits in the IA Targeted Absolute Return sector but is very much a multi-asset fund and offers true diversification as it does not invest in traditional equities or bonds. Instead it focuses on autocalls (or institutional structured notes as they are also called), convertibles, zero dividend preference shares, and discounted assets. The fund also invests in alternative investment trusts such as those investing in lending or private equity. Manager Dr Niall O’Connor says it “gives investors additional asset class diversification away from standard multi-asset funds”.

You can hear more about this fund in this video interview:

Related learning: How continuation votes can provide investment opportunities

A reminder of the Learning Objectives

• Identify the key benefits of multi-asset investing
• Understand the advantages and disadvantages of multi-asset funds over passive offerings
• Consider the role multi-asset plays within an investment portfolio