Multi asset funds serve up a free lunch in uncertain times

Multi-asset funds are having a bit of a moment. Investors are piling into the asset class faster than the Bank of England can make a fresh rate hike, or the Government can screech into another policy U-turn.

Mixed asset were the best-selling funds in July, taking in a healthy £861m from UK investors, according to the Investment Association. It was also number one in June, with investors putting in £526m*.

Vincent McEntegart, manager of the Aegon Diversified Monthly Income fund, explains the attraction: “In uncertain times, like these, investors may prefer to delegate asset allocation
decisions to a professional fund manager. And multi-asset funds are a more appropriate destination for investors with a cautious risk appetite.”

When it’s not clear which way the investment wind is blowing the advantage of multi asset funds is they spread your risk, giving you the best chance of see-sawing returns and losses. Aegon’s Diversified Monthly Income fund, for example, currently has around 51% in fixed income, 32% in equities, 5% in real estate, and 12% in alternatives (infrastructure and renewable energy), as well as some emerging market currency positions**.

With the challenges in equity and fixed income markets in recent times, investors have started to think wider than those two traditional asset classes for a more rounded return, says Richard Parfect, manager at VT Momentum Diversified Income fund.

“Diversification is often referred to as the only free lunch in investing and hence why multi- asset themes are again coming back in vogue,” says Richard.

“Elevated inflation also plays a part in this thinking as many alternative assets can offer a hedge to this,” he adds.

The valuation driven approach of the VT Momentum Diversified Income fund means the manager is seeing “an abundance of compelling opportunities in both equity and fixed income”, as prices come back and yields and dividends grow.

The fund has always had a large footprint in alternatives, and although this asset class has been challenged in recent markets as interest rates rise, this again has meant some strong medium-term opportunities have come on radars.

“This positioning should prove increasingly rewarding as confidence grows on the turning of inflation and interest rates across markets,” says Richard.

Multi asset funds may be in fashion, but their managers are not resting on their laurels. The investing landscape remains full of potholes and trenches even for funds designed to spread risk.

The M&G Episode Income fund and its sister funds and strategies have, for example, been on something of a steady but cautious investment journey in 2023 to date.

While total investment returns for the year remain in positive territory across the range, Episode Income manager Steven Andrew says risks around the lagged effects of the aggressive cycle of interest rate hikes has kept him “neutrally positioned” towards risk assets.

Lofty equity earnings expectations and a higher-for-longer interest rates scenario are also “clear sources of potential vulnerability”, he says, in a world where assets are competing with such a high cash rate. Steven has removed the fund’s overweight exposure to global banks and tech stocks.

Potential risk-off diversification using fixed income remains attractive. Steven has broadened his exposure from the US to include UK and German bonds and likes emerging market sovereigns and currencies.

Paul Flood, manager of the BNY Mellon Multi-Asset Balanced fund, has also been increasing his exposure to bonds, given the increased yields available, which are now at decade-long highs.

As inflation comes back down, he believes bonds “will offer both a return and provide good diversification benefits to growth assets, which has been lacking more recently”.

Multi-asset funds, says Paul, “provide investors with the flexibility to adapt to the prevailing backdrop and adjust their positioning and asset allocation in a timely manner”.

Steven admits in the multi-asset space ‘balanced’ bond/equity portfolios have experienced significant amounts of volatility, “and in some cases steep losses”, over the past 18 months or so.

But he believes the higher-yielding environment has led to a “significant amount” of value being restored across many asset classes.

“We would argue that portfolios are now better positioned to navigate the range of potential market conditions moving forward,” he said.

While market as well as fundamental volatility remains elevated, an active multi-asset strategic and tactical allocation is not a bad way to get hold of attractive assets as well as respond to shorter-term price moves within portfolios.

Research all Elite Rated Multi Asset funds here.

*Source: Investment Association, fund statistics, July 2023
**Source: Aegon Asset Management, September 2023

_{Photo by Mae Mu on Unsplash}