Multi-asset funds: The ready meal approach to investing

Multi-asset funds do exactly what they say on the tin: they contain a combination of different asset classes. Someone else picks the assets so that you don’t have to, serving up diversification on a plate.

The simplest multi-asset funds contain a combination of equities and bonds. Elsewhere, you can find multi-asset funds that also mix in property, commodities such as gold, and even a sprinkling of private equity, hedge funds, derivatives and other alternative assets.

Simple, one-stop shop approach

Multi-asset funds therefore provide a simple alternative to picking your own combination of funds based on single assets, or agonising over individual shares and bonds. You end up with a balanced meal from a single fund, rather than shopping for the individual ingredients.

The fund manager can move money around between different types of assets, depending on market conditions, without you having to lift a finger. Multi-asset funds make life easier by wrapping up diversification and rebalancing in a neat package, thus avoiding at least two of the seven deadly sins of investing.

Another benefit is lower volatility – and therefore less stress. By combining assets that behave differently in different market conditions and are unlikely to all fall in value at the same time, the investor should be in for a smoother ride.

Multi-asset funds can therefore be a good solution for investors who are just starting out. They can also provide a core holding for those wishing to spend less time managing their portfolio, topped up with other ingredients to reflect the investor’s financial goals and values.

Rising popularity of multi-asset funds

The "ready meal" approach to investing has proved increasingly popular. Looking at the £1.3 trillion in assets under management in the UK in September 2020, a chunky £160 billion was accounted for by mixed asset funds, according to statistics from the Investment Association.

Private (as opposed to institutional) investors find them even more appealing. Mixed asset funds totted up to more than a quarter of retail fund sales in September 2020.

Not all multi-asset funds are cut from the same cloth

With rising demand, asset managers have fallen over themselves to launch new products. Investors now face a bewildering choice of hundreds of different multi-asset funds.

Different funds allow their fund managers different levels of freedom. In its simplest form, a multi-asset fund can be a “dual asset” fund containing two types of assets, typically equities and bonds (and a bit of cash). The proportion invested in each is typically predetermined as a fixed proportion of the fund or expressed as a range (40-60% in equities, for example). Other multi-asset funds really live up to the name by investing across a whole host of asset classes, including commodities, property, currencies and derivatives, to name a few. The fund manager may also be given much more leeway to move between asset classes, attempting to anticipate market changes and increase returns. It basically acts a bit like a mini independent financial advisor (IFA), but without the personal touch, and with more focus on strategic asset allocation.

Multi-asset funds can also use different ways to invest in the different assets. Some hold the assets directly, others invest in a basket of funds, either active or passive to achieve their asset allocation goals. Some take a global approach, while others contain more country-specific investments.

Because of all these differences and variations, each multi-asset fund tends to have a slightly different aim. Some funds focus on growth, while others focus on delivering income. If you want to make your money matter beyond financial returns, you can also find multi-asset funds run with ESG principles in mind.

Weighing up risk and return

Multi-asset funds are usually driven by the proportion invested in equities. As discussed previously, this can vary quite a bit between funds but also within funds at different points in time.

The Investment Association has defined different brackets for multi-asset funds, driven by the proportion invested in equities:

• Mixed Investment 0-35% equities
• Mixed Investment 20-60% equities
• Mixed Investment 40-85% equities
• Flexible Investment, where the fund manager has free range with no maximum or minimum limits for the equity proportion.
• Targeted Absolute Return, which aim to combine assets to deliver positive returns over a certain time period, although results are not guaranteed.

Generally, the higher the percentage of equities, the higher the degree of volatility – and with it the higher potential for returns. Bear in mind that just because there is a bigger proportion invested in equities, it doesn’t necessarily mean a significant increase in risking permanent loss of capital, although you are likely to see your balance hit higher peaks and lower troughs. For more on risk and volatility, check out What is risk?.

A multi-asset fund with a large proportion of equities might be suitable for investors without any other equities in their portfolios, whereas investors who have already invested in separate equity funds might look for a multi-asset fund with a lower proportion of equities, to help with diversification. More cautious souls, or those investing for short time periods (less than five years) with fixed goals, might also prefer to dial down the percentage in equities.

What's the catch?

Multi-asset funds may sound pretty great so far, so what’s the catch?

The main drawback is the flipside of their main benefit – someone else is making the asset allocation decisions, so you don’t have any control over the combination of assets in that specific fund. If you only hold one or more multi-asset funds, your asset allocation decisions are completely outside your control.

The second potential drawback is that it is hard to identify any overlaps. Multi-asset funds don’t always provide much detail about where the fund is invested, so you risk doubling up on some areas if you hold other funds focused on specific sectors. In contrast, if you hold an equity fund and a bond fund separately, it’s typically easier to see where each fund is invested.

Lastly, keep an eye on costs. Some multi-asset funds squeeze charges down to around 0.2% a year by investing directly in the different assets or using a mix of low-cost tracker funds. However, costs can spiral to well over 2% a year, for example if a multi-asset fund uses a mix of expensive active funds, and then levies its own charges on top.

Multi-asset funds have proved popular as a simple, one-stop shop, wrapping up diversification in a single fund. However, what you gain in simplicity you lose in control over your asset allocation. Check the ingredients and the recipe before investing, as even funds in the same sector can have radically different aims and proportions in each asset class, and watch out for charges. As with any other category of funds, it’s about finding the one that matches your own attitude to risk and financial goals.

Date of publication: 9th December 2020