Multi-asset funds are an important sector in the UK and they have seen growing inflows relative to other categories in recent years. Their popularity may be due to their suitability for individuals and independent financial advisers, or IFAs, who want to hand over the bulk of investment decisions to an investment manager.
These funds can give a false sense of comfort or oversimplify the potential risks
There are some important changes in the UK that have supported and continue to drive growth in multi-asset funds based on their suitability as complete investment solutions, including the Retail Distribution Review and the increased choice given to individuals at retirement. The RDR helps to ensure that only those investments that are suitable, taking account of clients’ circumstances and risk tolerance, are recommended.
As a result, IFAs must spend more time understanding their clients’ circumstances and objectives, which leaves less time for investment management and therefore increases their interest in outsourced solutions. Meanwhile, with individuals having increased choice at retirement, there are more unsophisticated investors with meaningful sums to invest, and they often turn to advisers who see multi-asset funds as the most convenient way of meeting investor needs.
Traditional Versus Outcome-Oriented
Traditionally, multi-asset funds have been categorised by the structure of their portfolios, whether flexible or constrained to an asset-allocation range. This is in contrast with funds that are managed to an objective and have been given the label “outcome oriented” in the UK. There is at least as much variation among this outcome-oriented group as there is across traditional multi-asset funds, but the different objectives broadly fall under the three headings of target return, target risk, and target income.
Outcome-oriented funds should be looked at relative to their objectives to hold them accountable for meeting what they have promised or indicated to investors. In general, they meet their pre-defined objectives. However, the period under analysis has been a benign environment and risk-adjusted performance is very similar to traditional multi-asset funds.
That outcome-oriented funds and traditional multi-asset funds perform similarly is not surprising, given that our analysis shows their underlying portfolios are not significantly different from one another. As with traditional multi-asset funds, most outcome-oriented funds typically underperform representative indices.
In general, outcome-oriented funds' charges are similar to those of traditional multi-asset funds. Because portfolio positioning, risk-adjusted return profiles and charges of outcome-oriented multi-asset funds are similar to their traditional peers, there's little reason for categorising the two groups separately. Defining mandates by return, income, and volatility objectives may be easier than asset-allocation ranges for people with limited investment knowledge to understand. However, this can give a false sense of comfort or oversimplify the potential risks.