The first month of 2010 has been marked by a deluge of multi-asset fund launches. A week ago, Heartwood Wealth Management announced the launch of its CF Heartwood Cautious Multi-Asset and Growth Multi-Asset Funds, which will be followed soon with the launch of the Balanced and Balanced Income Funds. The new multi-asset funds will invest primarily in third party funds, including alternatives, structured products and derivatives as appropriate.
Other recent launches include Prudential's range of five multi-asset funds with different risk levels: Defensive, Cautious, Cautious Growth, Balanced and Adventurous, and Scottish Widows Investment Partnership (SWIP)'s SWIP Multi-Manager Optimal Multi-Asset Fund, a higher risk/return follow-up to its cautious SWIP Multi-Manager Diversity Fund launched in 2007. Allianz Global Investors is another provider expected to launch a multi-asset fund.
The recent hike in multi-asset fund launches brings some truth to predictions by industry players and independent financial advisers (IFAs) that multi-asset funds will be the "hot financial product" of 2010. The term 'multi-asset funds' refers to funds which invest across several asset classes and fund managers, which means investors are not exposed to the market gains or losses of just one asset class. Ultimately, multi-asset managers create the potential for capital growth and the conditions where the better performers may offset the poor performers.
Investors' desire to spread investment risk, coupled with the low interest rate environment in which it is hard to get returns on cash, have been touted as some of the reasons behind the increased focus on diversified strategies.
Another, more pressing, reason behind the spate of launches is the need for IFAs to meet the demands of growing regulation, such as the Financial Services Authority's (FSA) Treating Customers Fairly (TCF) initiative and the Retail Distribution Review (RDR). These require IFAs to ensure a fair deal for consumers and consider as wide as possible a range of investment products to meet client risk and investment objectives.
So what benefits do multi-asset funds hold for the private investor?
■ Diversification
The main benefit of multi-asset funds is the diversification these funds offer which in turn lowers risk and volatility. This could be of particular benefit to smaller investors, with for example only £5,000 to invest, as it allows them to achieve instant diversification by investing in just one fund. It would be difficult to build up a diverse portfolio of many funds with an amount this small because funds typically require a minimum investment of £500 or £1,000.
"Multi-asset funds are good for smaller investors or an Isa (individual savings account) portfolio with a £10,200 limit," says Adrian Shandley, managing director of IFA, Premier Wealth Management.
A multi-asset fund could be the entire portfolio or could be used as a core holding with additional 'satellite funds', for example 5 to 10 per cent allocated to commodities or emerging markets funds, suggests Martin Bamford, managing director of IFA, Informed Choice.
Bernard Henshall, head of multi-manager at SWIP, says a more adventurous investor could, for example, put half of their portfolio into a multi-asset fund and the other half into single stocks. He notes growing interest in multi-asset funds from self-invested personal pensions (Sipps).
Multi-asset funds also allow the fund manager to look for more areas to generate growth.
■ Control
Multi-asset funds are good if investors don't have a 'hands-on approach' to their investments and don't want to constantly monitor allocation, although Mr Bamford adds that even these funds need reviewing.
Multi-asset funds can be helpful if you are investing without an IFA, and in some cases even if you do have one. "Some IFAs don't have the expertise or resources to asset allocate in which case it makes sense to outsource this to the asset manager," says Mr Bamford. "We, for example, have an investment committee but smaller firms might not. You need to ask your financial adviser about their resources and experience in this regard."
However, Mr Shandley points out that if a multi-asset fund is held as part of a wider portfolio, reallocation within it could unbalance the wider portfolio's allocation.
■ Wealth preservation
Multi-asset funds could also be used for pension portfolios nearer to retirement when you should be looking to reduce risk and volatility.
"UK investors and advisers have traditionally focused on equities, but taking a directional bet on these is not a good long-term strategy," says Jonathan Fry, director of financial planners, Jonathan Fry. "It is also not an intelligent wealth preservation strategy."
Family wealth funds, which have been running for decades or in some cases centuries, use multi-asset investing to preserve wealth. Some of these funds are now available to the wider investment market: examples include RIT Capital Partners and Caledonia investment trusts. In 2008 the open-ended Iveagh Wealth Fund was launched, which replicates the asset allocation for the Guinness family and clients of its family office.
Multi-asset funds can be useful in times of economic uncertainty, because they are not overly exposed to one asset class and can reallocate. Mr Bamford says it can be difficult to rebalance your portfolio yourself: for example, with the recent improvement in markets investors could be tempted to increase exposure to equities, but you could in the process be taking on too much risk.
It can also be difficult to call the market in less turbulent periods. "Very few investors are good at timing investments," says Gill Hutchinson, head of investment consultancy at Old Broad Street Research. "For many, multi-asset funds make sense as they provide diversification and typically are less volatile than many single asset funds, in particular, equity funds."
However Mr Shandley believes that multi-asset funds are not a good idea in the current environment - unless you anticipate a significant downturn in equities. He says: "Multi-asset funds suffer in a recovery because despite the argument that they are pro-active - I would say they are more reactive and tend to reallocate when things are bad - bolt the stable door after the horse has bolted."
As a result, says Mr Shandley, the performance of these funds always tends to occupy the middle ground rather than deliver any outperformance, although of course there are some exceptions to this.
However, Justin Modray, founder of financial website Candidmoney.com argues: "Given that the recent rally was mostly driven by higher risk assets, a well diversified multi-asset fund will have lagged. But then that same diversification should have reduced losses when markets dived during 2008."
A good multi-asset fund, according to Mr Modray, should strive for consistency by providing reasonable returns during the good times and shielding investors from painful losses during the worst of times.
