How platforms' multi-asset funds compare

The messages emerging from central bank meetings last week make sober reading for investors. The Bank of England warned of the UK economy sliding into a recession this year as it raised interest rates in a bid to stem the pace of rising prices, with inflation now forecast to hit 10 per cent by the autumn. When it came to future rate rises, the message from Andrew Bailey, the Bank’s governor, was more cautious than the market had expected. But the suggestion of lower growth and persistent inflation knocked the pound and renewed stagflation fears. 

Across the pond, the Federal Reserve (Fed) implemented its first half-point interest rate rise since 2000, with its chair Jay Powell trying to reassure the market by saying there was a “good chance” of a “soft landing”. However, just the day before his predecessor Janet Yellen, now treasury secretary, said the Fed would need to be “skillful and also lucky” to rein in inflation without causing a recession. The growth-heavy Nasdaq index has fallen by a quarter since the start of the year.  

This precarious economic outlook raises the question of how to allocate investments. If you don’t want to take a hands-on approach, you can always turn to multi-asset funds and let a fund manager make asset allocation decisions for you. And even if you do rely more heavily on your own skills, it might be instructive to have a look at these funds to help you think about your own asset allocation. 

Many of the largest platforms offer their own multi-asset funds, which typically rely on long-run strategic asset allocation assumptions and a traditional mix of equities and bonds. However, funds with a high allocation to bonds have faced struggles themselves in recent months amid elevated inflation and rising interest rates, leading some to believe that the old rules of diversification no longer hold. 

Within equity allocations, a UK 'home bias' has penalised investors for much of the period since 2008. The UK market's value bias and relative lack of technology exposure led to underperformance relative to growth-style factors. But that same bias has rewarded investors this year, as more cyclical and ‘old economy’ stocks have outperformed the wider market.

“The challenge for multi-asset managers is adapting to these changing trends, and incorporating a culture of challenge around whether long-held strategic asset allocation conventions are still fit for purpose in an inflationary regime,” says Henry Cobbe, head of research at Elston Consulting, who carried out a review of multi-asset funds on behalf of Investors’ Chronicle. 

Cobbe says the growth in do-it-yourself (DIY) investing is leading to more novice investors turning to platform multi-asset funds as either core portfolio holdings, or the entirety of their investment portfolio. “Understanding the risk-return characteristics of these broker funds can help investors when selecting a DIY platform with a view to using their 'off-the-shelf' solutions” he says.

Platform options

The table below shows the multi-asset funds provided by three of the largest platforms. Interactive investor doesn’t manage its own funds, but directs customers to Vanguard LifeStrategy in its “Quick Start” funds range. It’s important to note that the approach taken by all three is different. As its funds' names suggest, Vanguard has a straightforward rules-based progressive equity risk allocation. That means the proportion each LifeStrategy fund holds in equities rises iteratively across the range, with the remainder of portfolios typically in bonds.

AJ Bell's range also have progressive equity risk, but it actively manages the allocation and incorporates some alternative assets. Vanguard and AJ Bell’s funds are made up of passive funds and the management costs are low – 0.22 per cent for Vanguard and 0.31 per cent for AJ Bell. Hargreaves Lansdown's multi-manager range does not sit on progressive equity risk scale, but invest to specific mandates and also include actively managed funds. 

The fees for the Hargreaves funds are higher, with ongoing charges figures ranging from 1.2 to 1.34 per cent. However, as you can see, the asset allocation is similar across various products from all three providers in cases where they target similar risk tolerances and investment goals.    

Bonds losing diversification benefits

The question is, which has performed the best and most true to its risk profile? The answer depends on what time frame you look at. A striking development in recent months has been that losses on key bond exposure in the first quarter of this year were higher than the loss on equity exposure, as Dave Baxter recently noted. “Put simply, in a rising rate and rising inflation regime, bonds have lost their diversification and capital protection characteristics,” says Cobbe. 

As a result of this dislocation between equity and bond markets, broker fund performance was negatively impacted, with bond-heavy funds underperforming even 'higher risk' equity-heavy funds. The chart below shows how the funds have performed over the past three months – a period in which the MSCI World Index dropped 7 per cent in local currency terms, albeit was flat when performance was converted to sterling – as well as longer-term performance. 

Fund performance (%)

The higher risk funds have outperformed over the longer term as you would expect. But they have also performed better over the short term owing to the hit bonds have taken.  

Cobbe says the broader diversification away from pure equity or bond assets, to include portfolios focusing on infrastructure and absolute return, as well as sector tilts within the equity allocation – towards energy, healthcare and consumer staples – helped the AJ Bell range outperform the static-allocation Vanguard range across each risk profile.

The Hargreaves range was blighted by bond allocations, and HL Multi Manager Special Situations Trust impacted by a global equities' growth bias. Over a five-year period, Vanguard's low-cost straightforward approach has served investors best. 

Clearly, discussion of returns is not complete without taking risk into account. On a risk-adjusted basis, AJ Bell’s funds have performed best this year, says Cobbe. However, in the three years before 2020 he says Vanguard has the best risk-adjusted returns. While the data suggests that incorporating alternative assets into a portfolio has helped in recent months, a careful analysis of liquidity profiles is prudent to avoid the kind of fund ratings that have dogged open-ended property funds in recent years. Opting for an investment trust for alternatives allocation is one way to help mitigate this risk.

Ready made portfolios

Most platforms also offer 'ready made' portfolios. Hargreaves', for example, provide a combination of its multi-asset funds across three 'growth' and 'income' risk profiles (investors might note that all six have underperformed their benchmarks since launch in 2015). AJ Bell has four portfolios made up of funds from its favourite fund lists, and you can choose to add or subtract funds. interactive investor's starter portfolio directs investors to either Vanguard LifeStrategy funds or BMO multi asset funds for those who prefer active management. 

Some are now looking again at the value on offer in bonds. Bestinvest offers its own ready-made 'Smart' range – starter portfolios with five risk options to pick between, made up of ETFs. Ben Seager-Scott, head of multi asset funds at parent company Tilney Smith & Williamson, says the managers have now initiated positions in 10-year US Treasuries, hedged back to sterling, following the sell-off in government debt. "We’re continuing to favour [an allocation] closer to benchmark duration in conventional sovereigns now while keeping corporate credit positions mostly short-dated," he says.