What is multi-asset investing?
Multi-asset funds offer you a way to mix and diversify your investments across lots of different asset classes through active and passive funds, but have the reigns taken over by a professional investor aiming to deliver you returns while carefully managing the risks involved in doing so.
Here, we guide you through the strategy with Ben Seager Scott, head of multi-asset at broker / wealth manager Tilney Group, where he oversees £7bn of investments on behalf of clients.
The benefits of diversification
Much like the interminable selection of wands in Mr Ollivander’s Diagon Alley boutique (Harry Potter for those living in a cave) – as markets and access to markets have exploded, we face an increasingly vast selection of financial products with which to do magic for our returns. Deciding which markets, strategies, assets, or geographies are appropriate for our goals can be a mystifying endeavour.
Spreading your investments across a broad range of assets has its benefits. Famous portfolio theorist Harry Markowitz – that is, a bloke who thought it a good idea to invest in a list of companies to diversify the specific risks associated by investing in one company – offered this pithy observation in 1952:
“Diversification is the only free lunch on Wall Street”
At Steps to Investing, we believe you can go a long way to investing sensibly if you apply this simple concept (watch our jargon buster on Diversification). But how do you do it affectively? Too much – ‘diwursification’ – and you could end up with an expensive version of an index tracker; too little and you expose yourself to sector or asset class risks.
On top of this, there are around 3,000 funds on sale in the UK alone, not to mention 400 investment trusts and a new ETF almost every day.
Multi-asset investing could be the answer. These are funds run by a professional fund manager – oft referred to as an asset allocator – whose job it is to disseminate your investments across a wide range of assets. These may include shares, bonds, property, alternatives, cash, commodities, currencies or inflation-linked government bonds (check out Asset Classes). In short, it is a fund that strategically invests in other funds to diversify your risks.
Ben Seager Scott of Tilney Group
Ben Seager Scott is one of these professionals. I spoke to him about what the strategy is trying to do for his clients:
“Typically, with a single strategy, like equities [shares] – normally they just target beating some sort of benchmark index – a relative return. With multi-asset – rather than just one market, you invest across a range of assets to create a risk-controlled return over time.”
Because multi-asset funds are targeting outcomes such as investor risk profiles, or income or ethical mandates, rather than trying to beat a benchmark, they are free to blend assets and control investment risks more effectively. For the investor, it should be a much smoother ride.
How are multi-asset portfolios put together?
Starting with an investor profile and the level of risk they’re willing to take, Ben constructs the portfolio by deciding on what percentages to divide the funds among the different asset classes. This is known as strategic asset allocation. A more adventurous, growth driven portfolio will have a higher percentage of riskier assets, such as company shares, whereas a more defensive, income orientated portfolio will have a much higher percentage of safer assets, such as government bonds. Ben remarks:
“If you have a growth type asset – normally equities [shares] – you then combine it with others to try to moderate those returns. Blending those different assets is the core of multi-asset investing.”
This creates an “optimal blend [of assets] for a 10-year view” in order to try and achieve the profile’s particular target. A good example would be Tilney’s adventurous portfolio’s target of beating the consumer prices index (inflation) plus 4% each year.
Does anything else impact asset allocation?
It depends on the manager and the investment company: some stick to keeping the portfolio at the pre-determined percentages, but most look to current market conditions and adjust those percentages at the margin, known as tactical asset allocation. Ben sits in the latter camp, appreciating that short-term factors such as where we are in the economic cycle will influence the performance of individual markets or sectors:
“Within a 10-year investment horizon, there will be good times and bad times, so it makes sense to then tilt [the portfolio] depending on what’s happening within in areas such as company earnings, monetary policy, or fiscal policy.”
If long-term strategic asset allocation is the engine to get you to your destination, the near-term tactical tweaking of the portfolio is the fine-tuning to boost performance: turning the asset class dials up or down to take advantage of near-term opportunities and market shifts, to which Ben adds is “more of a journey, adjusting elements over time”.
Once the asset mix is decided, managers then go out and try and find the best funds to gain exposure to the individual asset classes. For Ben and his analysts, this means looking at potential returns after fees, and investing in passive funds where finding an effective active fund manager after fees can’t be found.
How does asset allocation work in practice?
As an example, we look to the Tilney Active Portfolio range at the end of April. As you can see below, the racier, growth orientated portfolio – The Tilney Adventurous Portfolio – has around ¾ of its funds in company shares (equities), a riskier asset class.
Tilney Adventurous Portfolio
Tilney Defensive Portfolio
Below is its more risk-averse portfolio, The Tilney Defensive Portfolio. In it we see much higher percentages of safer asset such as cash and investment grade corporate bonds.
How expensive are multi-asset portfolios?
It very much depends on who’s offering the products and what’s underneath the bonnet – its underlying investments. Providers such as robo-advisers attempt to replicate multi-asset strategies, but tend only to use passive products to keep costs down, with varying degrees of human intervention in their tactical view.
Wealth managers such as Tilney will allocate to both active and passive funds, which tends to lead to higher costs, but also means you have investment professionals looking for the best funds (in their view) in the market, and at tactical allocation.
Ben tells me that at Tilney they charge a 0.75% management fee for its DIY investor range, plus the underlying cost of the funds. This means that as it stands at the end of April 2020, the ongoing charges figure (OCF) – the total cost to the investor – was 2.14% for the adventurous portfolio and 2.18% for the defensive.
Where can I buy one?
For more active portfolios look to the share dealing services. Tilney’s Active Portfolio range – available to DIY investors in the form of its Ready Made Portfolios – are available in their platform Tilney Bestinvest.
If you want something cheaper, an alternative could lie with the robo-adviser platforms: Wealthify, Nutmeg, Wealth Simple, and the like.
Please email and tell us what you think of multi-asset investing.
- Diversification or diwursification?
- Sensible risk-controlled returns or snooze-fest?
- Efficient one-stop-shop or shopping at Harrods?