What are multi-asset funds?

Unlike many investment vehicles that focus on a single asset class, such as UK equities, multi-asset funds invest across a broad range of global assets, including equities, fixed income, property, commodities, and cash. This diversification is crucial because individual asset classes can perform differently under varying market conditions. By combining assets with distinct risk/reward profiles, multi-asset funds aim to smooth returns over time, reducing the impact of market volatility.

For instance, equities offer the potential for long-term capital growth but are typically more volatile than fixed income securities, which provide a steady income but offer less scope for capital appreciation.

Bonds, particularly government and high-quality corporate bonds, offer relative stability and can function as a buffer during market downturns. Real estate, on the other hand, can serve as a hedge against inflation and provide both income and capital growth, but its illiquid nature can make it more challenging to manage during times of economic stress. In theory, the diversified nature of multi-asset funds allows for more stable long-term returns, with strong performance in some asset classes helping to offset weaker performance in others. This balance aims to help reduce the overall risk of the portfolio while providing exposure to a wide range of potential opportunities.

In addition to traditional asset classes, many multi-asset funds also include alternative investments. These can range from precious metals like gold, which serve as a store of value in turbulent times, to niche sectors such as music royalties, which provide income streams uncorrelated to traditional markets.

Other alternatives include litigation finance, which offers returns based on legal claims, or infrastructure investments, which generate income through long-term projects. By incorporating alternatives, multi-asset funds add another layer of diversification, reducing their reliance on mainstream asset classes and enhancing their potential to generate returns in a wide array of economic environments.

 

Considerations of multi-asset funds

While diversification is a key strength of multi-asset funds, it can also be a limitation. In a concentrated portfolio, significant gains in a single outperforming asset can drive higher returns, whereas in a multi-asset fund, the returns may be diluted by underperforming or more stable assets. This means that during periods when one asset class performs exceptionally well, a more focused approach could deliver superior results.

Another challenge is that the typical inverse correlation between asset classes, such as equities and fixed income does not always hold. There have been instances where both have performed poorly simultaneously, reducing the effectiveness of diversification as a risk management tool.

Moreover, multi-asset investors are highly dependent on the expertise and judgement of the portfolio manager. The manager’s ability to assess market conditions, adjust the asset mix, and make timely decisions is crucial. Poor decision-making or a misreading of market trends can lead to suboptimal outcomes, even in a diversified portfolio. 

Targeting multiple goals

Multi-asset funds are designed to create balanced portfolios that can be calibrated to various levels of risk tolerance. There are a huge number of multi-asset funds available to UK investors. Providers generally supply a variety of funds in one range, each designed to target specific goals and risk/reward requirements. This offers a spectrum of options within a single range, from cautious to adventurous approaches to risk. 

At one end of the risk/reward spectrum, a sub-fund targeting growth could allocate 70% to 90% of the portfolio to equities, while an investor seeking income and stability could opt for a fund from the same range with an 80% allocation to fixed income.

Raising the bonnet on multi-asset funds

Multi-asset funds aim to achieve their investment objective by employing a blend of both strategic and tactical asset allocation across a diversified range of global asset classes. The portfolio manager seeks to exploit their experience, knowledge and proprietary research to deliver outperformance through stock selection as well as asset and geographical allocation.

Managers draw on the specialist knowledge of individual teams in areas such as equities, fixed income and real estate when making investment decisions. By combining diversified and relatively uncorrelated assets, the portfolio manager will seek to control investment risk in line with a particular multi-asset fund’s risk profile.