When we decide to buy a property to live in, we don’t just look for the cheapest house in the country or the property that’s been promoted the most on estate agents’ websites; instead, we identify our housing needs and restrict our search to properties that will meet those needs. Investing for a long-term goal such as one’s retirement is just the same. Deciding how to allocate your investment within various asset groups, regions and sectors is a crucial step of successful investing. It is a prerequisite to selecting individual securities for your portfolio: only once you’ve decided what proportion of your investment you want to have in, for example, the UK stocks that pay a reliable dividend, can you then seek securities that meet those criteria.
For investors who wish to put this job of asset allocation into the hands of a fund manager, there are various options across the fund spectrum, including multi-asset funds, lifecycle funds, and target-date funds.
Homing in on multi-asset funds, these types of funds typically invest in equities, bonds, commodities and real estate, and manage the asset allocation according to specific goals or market conditions. Some multi-asset funds are fund of funds, in that they use equity funds and bond funds to build their portfolio, in addition to maybe cash, commodities and property investments.
Morningstar assesses the holdings within each fund’s portfolio and categorises the funds accordingly. For investors wanting funds based in pound sterling, we have several allocation categories:
GBP Aggressive Allocation funds have a mandate to invest in a range of asset types for a GBP-based investor. The equity component will usually exceed 65% in the normal running of the fund.
GBP Moderate Allocation funds have the same mandate to invest in a range of asset types for a GBP-based investor, but the equity component will usually be between 35% and 65% in the normal running of the fund.
GBP Cautious Allocation funds have the same mandate, but the equity component will not exceed 35% in the normal running of the fund.
For funds with an even more flexible approach that does not restrict the proportion of assets to be held in equities at any one time, the Morningstar GBP Flexible Allocation category lists funds that have a largely unconstrained mandate. Funds in this category will invest in a broad range of asset types with little restriction on asset allocation at any one time.
Morningstar’s Screening tools can help you find the right fund for you. Let’s take a look at a flexible allocation fund and investment trust that have earned positive Morningstar Analyst Ratings, and a flexible allocation ETF.
Fund
Morningstar’s Manager Research team rates this fund Bronze:
"This is a higher-risk unconstrained multi-asset fund that can be used as a long-term holding within a UK investor’s portfolio.
"We have a high regard for the breadth of investment and fund experience that fund manager Robin Geffen has acquired over his career. This fund’s portfolio construction incorporates both the manager’s top-down views and the output of the team’s research process. Asset allocation is unconstrained and very high-conviction in nature and the resultant portfolio consists of approximately 30 stocks.
"At the company level, the fund’s analysts focus on industry behemoths and assess the management team’s track record, the firm’s free cash flow generation, corporate governance and a myriad of other factors. We like this rigorous investment process, which combines in-depth company and sector research with the manager’s macro insights."
The ongoing charge of 2.08% for the retail-investor share class is expensive compared with the median retail share class in the category.
Investment Trust
Personal Assets (PNL)
Morningstar’s Manager Research team rates this fund Gold:
"Robin Angus, who was instrumental in the launch of the Personal Assets trust back in 1983, is responsible for setting the asset allocation. He does this in conjunction with his fellow board members as well as Sebastian Lyon, the investment manager.
"The day-to-day management is under Lyon's control, and the board gives him parameters within which to manage it. His first aim is to preserve capital, and his second aim is to grow the assets over the long term.
"Lyon has the ability to invest in equities, bonds, index-linked bonds, precious metals and also to use cash actively; indeed, asset-allocation decisions are a key part of the process. He doesn’t look to make tactical moves; rather, decisions are strategic and moves are made very gradually over months or even years."
The ongoing charge is 0.91%, which compares very favourably with its category median peers.
ETF
db x-trackers SCM Multi Asset ETF (XS7M)
The only ETF in the Morningstar Flexible Allocation category, db x-trackers SCM Multi Asset seeks to track the price and yield performance – before fees and expenses – of the SCM Multi Asset Strategy.
The ETF is not currently rated by Morningstar Analysts but carries a 3-star Morningstar Rating, illustrating that on a risk-adjusted performance basis, it has closely tracked the broader category’s performance over the past three years. Indeed, returns of 9.1% in 2013, 3.9% in 2014 and 3.9% so far in 2015 are all around 5 basis points above or below the category average.
Db x-trackers say the fund aims to accumulate returns significantly ahead of inflation through exposure to various asset classes. Its portfolio is compiled of other exchange-traded funds linked to various asset classes, including equities, fixed income and commodities; certificates linked to exchange-traded commodities; and potentially cash deposits.
The ongoing charge is 0.53%.
