“Multi-asset” the buzzword for 2013, but can it deliver?

If “Absolute Return” was the buzzword of 2012, this year has started with a series of managers promoting the attraction of their multi-asset funds.

The term is not new, but the strategies are being pushed as the new best thing for a still uncertain, if improving, environment. Other terms used are “dynamic allocation” strategies, “opportunity funds”, and “diversification funds”.

However, critics charge the “new” concept is simply a marketing-driven extension of old “balanced funds” which are unlikely to suit the highly specialised demands of modern investors.

While many asset managers have run multi-asset teams for some time, the teams and products are being reinforced or overhauled.

In the past few months Coutts, Momentum Global Investment Management, Austrian boutique MYRA Capital, Four Capital and Mirabaud Asset Management, both Swiss-based, Henderson, Newscape Capital Group, Russell Investments, Baring Asset Management, Threadneedle, Schroders and Allianz Global Investors, to name a few, have promised outperformance from a diversified portfolio able to react to the still volatile market environment. All point out the versatility of a multi-asset structure.

Multi-asset investing can be via a public or private company, a partnership, a trust or a fund. Among funds, the structure can be a mutual fund, hedge fund, trust fund or income fund, all with slightly varying characteristics.

The essence of a multi-asset fund is that holdings are diversified across asset classes, usually bonds, equities, real estate, commodities and private equity, as well as other funds and structured products. The portfolio will usually be diversified geographically, as well as by strategy.

It is a complex proposition. Managers typically focus on income or long term capital growth, but even this phrase has different meanings, ranging from three years, to the length of an economic cycle.

The central appeal is to investors with a medium (rather than high or low) risk tolerance, who are seeking maximum protection via diversification. Active asset allocation is effectively outsourced, and it should be cheaper and quicker to switch holdings within a multi-asset fund than between dedicated funds.

However, some investors challenge the record of active managers, as well as the fees associated with such structures. The structure may have a single, combination of dedicated benchmark.

“Dynamic diversified multi-asset funds aim to invest in a mixed portfolio of assets,” explains Alan Miller, chief investment officer at SCM Private (pictured).

“However, as with all investments, it is vital not to be seduced by the name or promise of ‘safe’ or stellar returns and to carefully dissect the small print  – there are a number of historical examples of funds with gizmo titles which have in reality delivered abysmal performance.”

Being at the active end of management scale, multi asset funds may attract not just the management fee, but a performance fee as well, with some of the more exotic strategies imposing entrance and exit fees, gates and high water marks typical of hedge funds.

Miller says analysing fees are critical to assessing performance. “For example, if the fund is charging 1.5% pa in fees, and the underlying fund costs, plus two sets of custody and administration costs and the extra underlying dealing costs of at least 0.5% pa, you’re probably paying 3% pa+ behind your index before your ‘dynamic’ journey even starts. Mix in a bit of investment committee related consensus rear view mirror investing, found in almost every major institution, and it is easy to see why these funds can fail to live up to their marketers dream.”

Since they cover many asset classes, providers of multi asset funds have to ensure they have deep expertise in all the sectors and locations they target.

“The skills and capabilities needed are a step change up from those of specialist fund managers,” one consultant noted. “We have been told for years how one asset manager can’t be all things to all investors – now it seems they can be if it suits them. We are very cautious about these claims.”

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