Multi-asset funds vs robo advisors

I’m not sure if Google redid its algorithm, but I’ve been getting a ton of ads for Robo Advisors over the past few weeks. It’s obviously missed the mark targeting me with the ads, but it got me to thinking: just how popular is this area? It turns out, quite a bit.

From 2019 to 2020, the size of the robo advisor market increased from $827 billion assets under management to $987 billion*. Less confident investors are targeted because robo advisers pick the investments for them. However, as few as 10 questions determine the “best fit” ready-made portfolio for each client. While the US has a clear winner in this area in Vanguard, the UK doesn’t have a clear front-runner as yet, which could account for the increased marketing.

“The algorithms that orchestrate our ads are starting to orchestrate our lives.” — Eli Pariser, author

What are robo advisors?

A robo adviser is an online platform that uses a short survey to determine your investment strategy and attitude to risk. It then matches you with a suitable portfolio and will manage your investments. It’s a hands-off approach that allows new investors to invest without needing to learn the ins and outs of investing.

Someone explained it to me like this: think of robo advisors like Netflix for your money. Just like Netflix uses your viewing history to suggest what’s next in your queue, robo advisers use the survey to choose your best investments. While I appreciate the analogy, Netflix is continually learning and has thousands of outcomes, robo advisors typically have a limited number of outcomes. To my mind, a better analogy would be Nando’s spice levels with Lemon & Herb being a cautious portfolio and Extra Hot an aggressive portfolio.

The best of both worlds: multi-asset funds

Robo advisors are effectively building you a portfolio and managing it in line with your appetite for risk. The portfolio is regularly rebalanced to ensure it meets your requirements. You can update your portfolio and effectively go from cautious to aggressive – all qualities that can also be achieved with a multi-asset fund.

Multi-asset funds typically offer you a wide range of shares, bonds, property and other types of investment from various geographies, in one simple product. This helps with diversification and takes very little effort as an expert manager makes the decisions for you – just like a robo adviser.
Except with a multi-asset fund you’re putting your faith in a human, not a machine, and portfolios are actively managed not just rebalanced.

Choosing a multi-asset fund

Multi-asset funds are categorised by the amount of equities they can invest in, meaning no matter your tolerance for risk, there’s a fund out there for you. You can find out more about the different types of multi-asset funds in last year’s millennial money ISA breakdown.

The Liontrust Sustainable Future Managed fund uses a thematic approach to identify trends that will shape the future global economy, while the managers behind the BMO MM Navigator Distribution fund have been working together longer than most marriages! Gary Potter and Rob Burdett were early pioneers of fund of fund investing and have worked together since 1996…or since I was 3 years old! Close Managed Income is another fund of funds on the conservative side of the spectrum. The team has a strong focus on capital preservation (think that Lemon & Herb at Nando’s). A spicier option is Premier Miton Diversified Growth. This fund can hold up to 85% in equities, often covering all major global regions. The M&G Episode Income fund uses behavioural finance in its approach with the manager investing against the herd. The portfolio currently includes holdings in South African and Brazilian government bonds**.

So, whether you’re a sustainable investor or interested in psychology, there’s an Elite Rated multi-asset fund for you. Often, their underlying holdings are also Elite Rated products – talk about bang for your buck.

*Source: JustCoded, 8 April 2021
**Source: fund factsheet, 30 April 2021