WHAT IS A MULTI-ASSET FUND?

A multi asset fund is a single fund which includes within it a ready-made portfolio of funds from two or more of the 4 key asset classes: Equities, Bonds, Alternatives and Cash.
One way to imagine them is a Burrito with a little bit of everything: meat, veg and sauce (a diversified meal), wrapped up in a tortilla (a single fund wrapper) for convenience and ease of transportation!

Multi-asset funds are structured for three primary purposes:

1. To provide a ready-made “all-in-one” portfolios as a core or complete investment strategy
2. To deliver a targeted risk-return profile based on the mix of asset classes.  The higher the % equity allocation, the higher the risk-return characteristics.
3. To capture the benefits of diversification by asset classes selection within and across all asset classes.

Background

The earliest multi-asset funds were known as "managed balanced funds" which combined both equities and bonds. Prior to that investment trusts have always been a form of multi-asset fund given their flexibility to hold both equities and bonds.

Multi-asset funds for UK investors

There are many ranges of multi-asset funds for UK investors.  They typically fall within the Investment Association Mixed Investment sector or Unclassified sector.  The challenge with the Investment Association definitions is overlapping equity risk profiles (a 60% equity strategy could be in the IA Mixed Investment 20-60%, 40-85%, or Flexible sectors, for example). By contrast, the Morningstar multi-asset fund categories have clear equity allocation parameters Morningstar GBP

One of the most popular multi-asset fund ranges owing to its elegant simplicity is the Vanguard LifeStrategy range.  This range of funds consists of an equity allocation (with a moderate UK home bias) and a bond allocation.  There are five risk profiles, as defined by equity risk: 20%, 40%, 60%, 80% and 100% equity risk.  This fund range represents a static allocation portfolio (the asset allocation within the fund does not change but is rebalanced to strategic weights).

When considering a multi-asset fund, we would propose considering the following design considerations:

Asset Allocation: is the asset allocation approach Static (the mix of assets is fixed in a Strategic Asset Allocation), or Dynamic (the mix of assets can be varied to reflect changing economic or market conditions using a Tactical Asset Allocation overlay).  Dynamically managed (or “active allocation management”) tend to be higher cost with the objective of 1) improving returns, 2) reducing volatility and/or 3) improving risk-adjusted returns.

Risk-return characteristics: risk and return are positively related.  The higher the level of riskiness (measured by volatility), the higher the expected return to reward that risk taken.  For returns greater than the return on cash, additional risk is required.  The higher the % equity allocation, the higher the level of portfolio risk-return opportunity.

Portfolio Construction Style: are the underlying fund components used to populate the asset allocation actively managed, index-tracking or a “blended” mixture of both?  This will have an impact on cost, with index-tracking fund components resulting in a lower Ongoing Charges Figure (OCF) for the multi-asset fund.

Portfolio Construction Format: are the underlying components funds to create a fund of funds (higher ongoing costs, but potentially lower portfolio transaction costs), or direct securities (lower ongoing costs, but potentially higher portfolio transaction costs) or a blend of both.

Open or Closed architecture: is a multi-asset fund manufactured on an open-architecture or closed architecture basis.  Open architecture means the multi-asset fund manager uses a majority of funds from third party fund managers.  Closed architecture means the multi-asset fund manager only uses funds from their own firm.  This can be analysed by looking at the provider of the underlying funds within a multi-asset fund.

Equity basket: how is the equity allocation constructed.  Is there a UK Home Bias, and if so – to what extent?  Private Client investment managers have consistently reduced their allocation to UK equities from 70% in 2000 to 25% today.   So what size should the home bias be? One key consideration UK equities have underperformed US/Global equities, but are a really useful diversifier owing to their lower correlation.

Bond basket: how is the bond allocation constructed.  Is it global (indirectly link to the Fed policy and US treasury curve), or UK (directly linked to the Bank of England policy rate and UK gilts curve.  What is the currency is it 80% 90% or 100% GBP denominated/GBP hedged.  What is the split between Government and Corporate and other bonds.  Is duration (interest rate sensitivity) actively managed?

Allocation to Alternatives; does the multi-asset fund range incorporate an allocation to alternatives.  This was a key diversifier to Bonds in the 2021-22 inflation shock and is important design consideration.  It’s also important to understand the nature and extent of the alternatives allocation.   How is the alternatives allocation constructued is it absolute return funds, alternative assets, real assets, investment trusts, and how liquid is it?

Evaluating performance: the best way to evaluate performance is to compare the risk-adjusted returns of one range of multi-asset funds against another range and against a neutral multi-asset benchmark, such as Elston's UK Multi-Asset Indices. Performance should be typically evaluated on a rolling 1, 3 and 5 year basis.  The “frontier” with the best and most consistent risk-adjusted performance is the one to go with – but past performance is not an indicator of future results: so understanding the manager’s philosophy and process is key in addition to the technical parameters above.

Multi-asset funds provide a convenient investment vehicle to deliver an investment strategy. Understanding what's inside them and how they are managed is key to inform comparison beyond risk-return statistics alone.