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Multi-asset funds: pros and cons By Rob Griffin
How do you make money, no matter what is happening in the economy? There are obviously no guarantees, but you can maximise your chances of making good returns over the long term by building a balanced portfolio that It all sounds a little too easy. The trick, of course, is choosing the right range of investments. So 'multi-asset' funds that provide diversification by offering you access to a broad range of asset classes will always be appealing to the average investor. Multi-asset funds Following changes introduced as a result of new legislation giving fund managers wider investment powers, a whole raft of investment houses have started launching multi-asset funds. Many of the biggest industry names are getting involved in this fast-growing area of business. By investing in a wider range of assets, they hope to deliver investors more stable performance. The rationale is straightforward. No single asset class can be guaranteed to top the performance charts each year, so it makes sense to have exposure to a broad mix of investments, including property, private equity, commodities and hedge funds. This new breed of multi-asset portfolios is just a natural extension of the more traditional balanced funds, which largely invest in two asset classes - equities and bonds. Balanced funds grew in popularity in the wake of the stockmarket slump triggered by the bursting of the dotcom bubble. People have increasingly been attracted to funds that can effectively act as a one-stop-shop for all their investment needs. However, it is unclear whether it's investor appetite or whether it's the vested interests of the fund management community that is driving demand for these products - after all, it's the job of marketing teams to dream up new types of fund in order to attract fresh money. Clients have long wanted to spread their risk across different markets while continuing to enjoy a decent positive return that outperforms cash - but up till now no one has been offering such products. The subsequent introduction of legislation that has enabled funds to be more innovative, he adds, has been the cue for global multi-asset, multi-strategy portfolios to take their place at the table. Who are they aimed at? Multi-asset funds are unlikely to be suitable for either very low or very high-risk investors. If you aren't worried about losing your money, then you would probably want to be invested directly into equities. However, for people who have a long-term strategy in mind, then having a multi-asset fund as part of a core holding in their investment portfolio makes sense. It's a similar argument for those who hate risk. You can't really argue with the investment philosophy behind these products. However, that doesn't necessarily mean that they will always be the most suitable product - the idea of not having all your eggs in one basket is fine in principle, but it's whether or not it actually works in practice. Another potential negative, is getting a poor return as a result of being either overly diversified or having too much exposure within a portfolio to an expensive asset class. Commercial property fits into this category. Different types of multi-asset funds In their most basic form, these portfolios will invest in a basic mix of equities, bonds and property, and in their most complex, they will have exposure to a broader spread of asset classes, including private equity and commodities. While some will be under the complete control of one particular manager, others will have a number of specialist experts within the investment house who will each contribute their skills and expertise to the stockpicking process. A prime example of this is the New Star Tri-Star Unit trust. The aim of this fund, which was launched last July, is to provide a combination of income and capital growth by investing in three types of assets - UK equities, bonds and UK commercial property. While lead manager, Gregor Logan, is in charge of factors such as general asset allocation and monitoring the money flows, he has the support of three well-known New Star managers, who provide the day-to-day management of the individual asset classes. Stephen Whittaker looks after UK equities, James Gledhill manages bonds, while the commercial property exposure is handled by Roger Dossett. Meanwhile, the Newton Phoenix Multi-Asset fund, run by Philip Collins, aims to achieve long-term capital growth from a balanced portfolio of assets, including equities, fixed interest securities, warrants and derivatives. The portfolio, which was launched four years ago, has approximately one-third of its assets in equities, a third in fixed interest and a third in other asset classes such as hedge funds, commodities, private equity and property. Fund-of-funds Another way of embracing multi-asset is going down the fund-of-funds route, where you choose a fund that, in turn, buys into a string of other funds that are top performers in each of the specialist asset classes in which you are interested. The New Star Cautious Portfolio Unit trust is one example of a fund of funds. This fund, managed by Craig Heron, holds equities, bonds, direct property, derivatives, investment trusts, exchange traded funds, hedge funds, commodities and structured products. Craig Heron and his team select their funds on the back of their own analysis. The starting point is a top-down view on where we are in the investment cycle and what are likely to be the best areas for investment at asset, thematic and sector levels. Then, when it gets down to individual markets, they consider what style is most appropriate, where they want to be placed as far as market capitalisations are concerned and whether, for example, they want to be overweight mid-caps. Of course, you don't necessarily need a multi-asset fund to get exposure to a wide range of asset classes. Theoretically, a good IFA should be able to help you achieve this aim. But even IFAs admit it's difficult to directly replicate a multi-asset fund - if you want true multi-asset exposure then you have little option other than to buy a specialist multi-asset fund. Investors that plump for the multi-asset fund route are also likely to be spoilt for choice over the coming months. The investment houses themselves, meanwhile, are in no doubt that multi-asset products are the way forward. Of course, time will be the true acid test for these funds. At the moment, many funds are too new to make any meaningful assessment of how they perform during different economic cycles. In the meantime, interested investors should do their homework before investing.
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