Multi-asset funds have seen a vertiginous rise in popularity during the past decade. While not a new phenomenon, multi-asset’s star has found itself in just the right position as a number of other events have aligned in its favour.
The rise in popularity has seen assets under management within multi-asset funds jump from £21bn to £126.5bn between 2005 and 2015, an annual growth rate of 19.4%, according to a recent study by CoreData Research, commissioned by Henderson Global Investors.
With its forebears in the fettered and then unfettered fund-of-funds ranges of the 90s, the modern era of multi-asset can be traced back to 2007, when UCITs III regulations came into effect, allowing managers access to more than just equities and bonds.
On its own, though, even that change would have been insufficient to catalyse the growth in such funds, other elements needed to be in place as well.
The first of these was the change in adviser attitudes resulting from the Retail Distribution Review (RDR). A change David Jane, head of Miton’s multi-asset team, describes as “a seismic shift” in the adviser industry.
“When your GP tells you that you need heart surgery, you don’t expect him to reach for his scalpel, you expect him to refer you to a specialist,” Jane says.
Jane believes the position of multi-asset managers as experts to whom everyone, from IFAs to pension fund trustees, can turn in an increasingly complex, low-yield world, explains part of the strong growth in assets under management seen during the past few years.
“Because they are now charging fees to their customers – and this is the most significant and best development in the industry that has happened in my career – they are wondering where they can add the most value for their clients.”
This question, he says, has added clarity to what the individual roles are in the advice chain and, as a consequence, individuals are thinking much more about risk – be it regulatory risk in terms of ensuring they are providing, in a demonstrable fashion, the best advice to their clients, or investment risk in terms of a fully diversified portfolio.
“Advisers have started to think of themselves like other professional services. And, for many, that has meant the realisation that their real skill set is in dealing with clients, understanding their tax situation, their entire financial situation, often from a multi-generational point of view, rather than asset allocation,” Jane says.
“They have recognised that if they outsource the investment bit they can focus even more on the client-facing part of the job.”
Patrick Connolly, a certified financial planner at Chase de Vere, agrees.
He says: “In the aftermath of the RDR, many advisers have accepted that they are not fund pickers, especially if they do not have the research capability with which to back it up.”
New favourites
It is not, however, just in the adviser space that multi-asset products have gained favour. Richard Philbin, chief investment officer at Harwood Capital, says: “If I look at my investing career, I have always said I will pick the asset allocation, but it has definitely become more acceptable to use multi-asset funds, eBill specially if the only way I can access a good manager is through such a product.”
David Aird, managing director of Investec’s UK client group, agrees there has been a progression on the part of wealth managers in recognising the benefits of multi-asset funds.
“It used to be hard to get discretionary fund managers to buy into global funds, let alone multi-asset funds, but over time their value has been recognised. Something similar is happening with multi-asset funds,” he says.
“The first phase of roll-out was in the institutional space through diversified growth funds [MA equivalents in the institutional space]. This was evident within the defined-benefit and defined-contribution space, where such funds were considered either as part of the alternatives bucket or as a core holding used to manage downside volatility.
“For many on the retail side now, funds such as Troy Trojan, Investec Diversified Income and Standard Life GARS are being used as a core holding, like a keel on a yacht,” he says.
The option of such a keel is increasingly important because the waters have been rather stormy of late, and the waves seem to be growing. As Jane points out: “Investors from the advisory channel right through to many of the big discretionary houses are hugely challenged about how to construct portfolios in a market where assets that have historically been low risk appear to be both risky and expensive.”
He says: “The very lowest-risk assets are considered to be short-dated government bonds, and in many cases these are offering a certain loss and the possibility of even greater losses in the event of rate increases.
“The highest-risk assets, perhaps smaller companies, appear to be priced more cheaply compared with larger companies than their historical averages, and equities in general seem to have an attractive yield compared with other assets.”
Income need
This dearth of well-priced traditional diversifying assets, especially in the fixed income space, is another major reason for the continued growth in multi-asset products.
Multi-asset funds, especially of the targeted absolute return variety, have in some areas replaced all or part of managers’ fixed income holdings in a bid to gain more thorough diversification. This is increasingly important in low-risk strategies, where the hunt for yield has continued apace.
Bill McQuaker, co-head of multiasset at Henderson, points out: “One of the strengths that multi-asset offers is the diversification aspect, and investors appreciate it offers some protection in more challenging market environments. But diversification is not sufficient by itself. Turbulent markets can place a heavy focus on the shape of portfolios, so the challenge is to be diversified in the right way.”
Hugh MacTruong, proposition manager for multi-asset and alternatives at Legal & General Investment Management, agrees that there is definitely more interest being shown in multiasset funds across the spectrum.
“DFMs, for example, recognise the economies of scale that multiasset funds can achieve, especially in more exotic parts of the market, while at the smaller end of the retail market there is a recognition that such funds can offer end clients a full solution.”
The diversification and the downside protection promised by many multi-asset products, especially when mixed with promises of a decent level of income, make for a heady concoction for investors heading toward retirement – especially in light of the recent pensions freedoms.
With life expectancy rising and more of the population reaching retirement age, so income is likely to only grow in importance, especially if one can achieve it without eating too much into capital.
This is the third piece of what is arguably an almost perfect storm for the growth of such funds.
According to Henderson’s research, 10 million people in the UK are more than 65 years old, and the latest projections are for 5.5 million more people over that age in 20 years’ time.
Setting targets
In the wake of the financial crisis there has also been a growing focus on specific client outcomes and an increasing aversion to relative performance measures. In such an environment, multi-asset funds that aim to provide a specific income target have been welcomed.
As Philbin points out: “One of the things we need to do as a profession is do what we say, and these funds are doing what they say on the tin.”
For Henderson’s global head of product and distribution services, James Bowers: “The reason for this explosion is that multi-asset is an essential building block. It can be a really solid platform for many investment portfolios at various points in people’s lives, be they at retirement, partly retired or fully retired. Potentially, there is no real limit to the amounts and types of products we could see.”
Bowers’ colleague, Paul O’Connor, co-head of multi-asset at Henderson, says: “I think we’ve seen the first generation of products which have been long-only and old-fashioned by nature. What we are seeing now is an increase in outcomes-based products and we have just started to build solutions in that area.”
Bowers adds: “Ten years ago, there was not much choice available: there were cautious or balanced funds and that was it. Now our role is to segment the market and to identify which strategies and outcomes we want to develop to meet client needs. Our role is to innovate and make sure we are increasingly allowing the client needs to take precedence in the product design.”
Exactly what the next generation of products will look like is anyone’s guess. If they can continue to promise good yields, legitimate diversification and specific outcomes, though, they are likely to be welcomed by the current market – unless of course they fail to deliver.
