What do clients really want - and need - from a multi-asset strategy? Aviva Investors' Justin Onuekwusi finds out.
It has been widely reported that the Retail Distribution Review (RDR), which finally came into effect at the beginning of this year, is expected to lead to an increase in demand for multi-asset funds.
Risk-targeted funds are seen as the next generation of multi-asset investment solutions and their many benefits have led to an increase in demand. These funds have seen significant inflows and there was a plethora of new launches in 2012.
My meetings with financial advisers during the course of last year mirrored this trend towards multi-asset investing. It was a hot topic, with three recurring characteristics of what exactly advisers were looking for when it comes to multi-asset funds in the new RDR world.
What do clients want - and need - from a multi-asset strategy?
Firstly, they wanted their multi-asset fund offering to give them both risk and governance controls. Advisers will have to establish whether funds are suitable for their clients’ in view of their attitude to risk, both initially and on an ongoing basis.
Risk-targeted funds aim to maintain risk within a particular range, so advisers and investors alike can align investments to their clients’ needs from the outset.
Additionally, as these funds continue to target that given range of risk, the adviser can take comfort that, as long their client’s attitude to risk does not change, the funds will remain suitable.
Active asset allocation
The second benefit advisers recognised multi-asset funds could give them was active asset allocation. They highlighted managing the path of performance over time through dynamic asset allocation as being vitally important.
In fact, managing this performance journey has taken greater importance in the risk on/risk off environment that has characterised markets since 2008. Such binary outcomes in markets are likely to continue into this year, with policymakers already taking centre stage as, once again, we were taken to the brink by US politicians squabbling over the fiscal cliff.
History tells us it is notoriously difficult to predict what politicians and policymakers are likely to do, and their actions will continue to lead to short-term uncertainty in financial markets.
With further uncertainty surrounding forthcoming negotiations over the US debt ceiling, the course taken by new governments in China and Japan, and the solvency of various European nations, it is clear policymakers will have a central role in 2013.
In this environment, it is likely to be extremely important advisers seek multi-asset funds that are truly active in their asset allocation.
Lastly, cost effectiveness has greater importance for advisers in the new RDR world. Recently, we have seen an increase in appetite from multi-asset funds to invest in passively managed vehicles, with the primary goal of driving down costs.
The debate on active versus passive management has been ongoing for years. There is a common misconception that a multi-asset portfolio investing in passive funds is a passive multi-asset fund.
However, it is asset allocation rather than stock selection which is the key determinant of risk and, therefore, returns of a typical multi-asset fund. So a multi-asset fund could invest in passive funds yet be extremely active in its asset allocation.
In that sense, a multi-asset fund that invests in solely passively managed funds can actually be more active than one that invests purely in active funds. This active use of passive funds can deliver significant cost efficiencies.
However, investing solely in passive underlying strategies in a multi-asset fund is not always ideal as it restricts the universe of asset classes in which one can invest. Examples include direct property and certain absolute return funds which cannot be accessed on a passive basis.
These asset classes can help to provide diversification in a multi-asset portfolio. In addition, there are some asset classes where active management is desirable, such as high yield bonds and convertibles. Here, it tends to be easier to identify managers that can outperform and passive alternatives are limited in number or tend not to track their indices well.
Multi-asset fund managers that can blend both active and passive exposures should be able to show greater flexibility and be better placed to balance cost effectiveness with strong risk-adjusted performance.
The coming year
The long-awaited RDR has finally arrived and 2013 should see further strong inflows into multi-asset funds, with a particular focus from financial advisers on those strategies that target risk, are dynamic in their asset allocation and cost effective.
With increased competition among multi-asset managers, these are exciting times and investors should ultimately benefit in the form of stronger risk-adjusted returns. We would expect it to continue into 2013, with risk-targeted funds becoming a core allocation of investors’ portfolios.
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