Multi-asset portfolios are growing in popularity, and are now available to the less sophisticated retail investor, Cherry Reynard charts their progress
THIS MONTH SAW the first multi-asset portfolio from a major retail brand name as Cazenove announced the launch of its Diversity fund.
It is not the first provider to do this, but the announcement shows how multi-asset portfolios are entering the mainstream.
Do these funds represent the ideal core investment? And if so, should we be expecting more launches from the retail market? These launches have been made possible by the new Non-Ucits Retail Scheme (NURS) and have taken a number of different forms.
The Cazenove fund aims to deliver a return of 4% over the consumer price index by investing in a mixture of equities, bonds, hedge funds, property, commodity and cash.
Exposure to hedge funds and property will be via investment trusts and commodity exposure is through funds.
Returns are generated through both fund selection and asset allocation.
A similar approach was used for the Close Finsbury MultiAsset portfolio, launched at the end of last year.
It blends funds to generate a return from both fund selection and asset allocation.
Not all funds within the portfolio are active, however, and Berry Asset Management (the fund managers on the portfolio) use exchange-traded funds for some exposure.
Product Innovations has recently launched a multi-asset portfolio in combination with Frontier.
This is a pure asset allocation fund.
It takes the premise of modern portfolio theory that asset allocation is the main driver of returns.
It combines index funds to give exposure to eight asset classes - global equities, global bonds, emerging equities, emerging bonds, commercial real estate, commodities, hedge funds and managed futures.
Index funds are used because they are cheap and few active funds outperform the market.
'Absolute' return The theory behind these products is sound.
Diversification between asset classes has been found to decrease risk and increase return.
While many equity managers talk of taking an 'absolute return' approach, it is only the truly exceptional managers who can generate positive returns in declining markets.
But taking direct exposure to hedge funds, commodities, derivatives or property is a difficult business as many of these products are either illiquid or expensive.
It is far better left to the expert through collective investment.
Richard Pursglove, director of fund management at Cazenove, says: "After the correction in the markets of 2001-2002, there needs to be a re-education in terms of client expectations. Rather than just a mixture of equities and bonds, investors need a truly diversified portfolio. Our modelling and back-testing suggests that the Cazenove Diversity fund should provide returns not dissimilar from a vanilla hedge fund and should reduce volatility. We are not saying this is the only solution, but we do believe absolute return products should form a far bigger part of private client portfolios." David Barclay-Miller, head of structured products at Product Innovations, says that these products are the natural successor to with-profits.
He adds: "This is a second generation product. This is what withprofits would have held if they had had the chance today." Alan Stokes, head of multi-manager at Lawrence House Investment Managers, agrees that this is a logical progression for the industry: "Going forward more investors will see the need to reduce risk by not putting 'all their eggs in one basket'.
In fact it is just a natural development of one of the original ideas behind unit trusts.
"Many people already use multi-asset class portfolios without giving much thought to it. As an example, our own Cautious Managed fund uses fixed income, equity income and cash. Dig deeper and you will find that among the fixed interest content the funds invest in high yield bonds, rated bonds, unrated bonds not to mention Gilts. Likewise the equity content is also divided between large, mid and small-cap stocks." A wider audience Who is the natural audience for these products? Barclay-Miller says that at the moment the most interest has come from the sophisticated end of the market, including Sipps, the bigger adviser groups who understand life bonds and investment specialists.
But he can see this democratising, especially after the product is brought onshore at the end of the year and minimum investment levels are lowered as a result.
He says it is a natural core holding and the group had built it as a one-stop shop - better suited to the less-sophisticated investor.
Until recently, one problem for multiasset portfolios has been that they have been launched by relatively niche players.
Cazenove has the brand and Product Innovations is on the verge of announcing a linkup with a major brand, so it looks like this will be addressed.
Many of the major fund of funds players have the in-house experience to launch this type of product.
For example, Gartmore has an in-house asset allocation adviser, plus the fund selection skills of Bambos Hambi's team.
It would be surprising if more of these products did not crop up over the next few months.
Education is key Alan Durrant, chief investment officer at Skandia Investment Management, raises one potential issue with multi-asset portfolios.
He says: "This is unquestionably a growing trend, but it needs careful explaining to a client. These products will not rise more quickly than the market when it is rising and protect on the downside. If someone builds a portfolio of value and growth equities, hedge funds, currency etc - in other words, a properly diversified portfolio, it should do reasonably well in all environments. But advisers should not get twitchy if the market is up 20% and the fund is only up 10%." Stokes agrees.
He says: "Problems could be that some individuals may make use of some of these new products without fully understanding the ramifications of using them… you should remember your Latin, caveat emptor." Multi-asset portfolios are likely to be a popular model in the future.
The inclusion of different asset classes should be a nobrainer, but as with all products there are likely to be those that do it well and those who do it badly.
For too long, retail investors have been limited to bald exposure to equities and bonds.
This is their chance to get access to the sort of portfolio management that has previously only been available to sophisticated private clients.
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