Cautious funds fail to spread market risk

Multi-asset funds are usually sold to investors on the basis that they can perform in all market conditions – but their recent performance has scuppered that claim.

The average multi-asset fund fell by 16 per cent over the past year, a larger fall than the overall Cautious Managed funds sector in which a number of them sit.

This is scarcely better than similar funds that have a more narrow investment range – and lower fees.

Those that did manage to perform relatively well – such as the M&G and Fidelity funds, which fell by only 3 and 6 per cent respectively over the past year – did so largely by playing on currencies through global bonds, one of the only ways to make money last year.

So, analysts now warn that the falls in nearly all asset classes have weakened the case for holding a multi-asset fund.

“It will certainly harm sales as they were sold on the whole diversification story and last year dispelled that notion,” says Ben Yearsley at Hargreaves Lansdown.

However, in many respects, multi-asset funds only do what most investors are advised to do with their own portfolios: diversify into a wide range of assets.

As well as holding staples such as bonds, equities and property, multi-asset funds also invest in hedge funds, private equity, commodities, and can even have overseas bank accounts as a currency hedge.

And the advice to diversify into different asset classes has not really changed. Last year’s events are seen as an anomaly rather than a sea change in the way people invest their money.

So multi-asset funds can still make sense for investors who do not feel they know enough about the markets to do their own asset allocation.

“I think last year was unique in that everything fell. That’s very unusual,” argues Yearsley.

“As a one-stop shop, they still have their place, if you want to buy one fund that gives you access to everything. Multi-asset funds are one of the only ways of doing that,” he says.

He adds that the funds may be more suitable for investors willing to take risk because of their exposure to more volatile types of investment. They may also suit investors without much time on their hands.

Adrian Lowcock at Bestinvest, which runs its own multi-asset portfolio for investors, argues: “While all investments fell last year, even in a falling market multi-asset portfolios really did have some defensive qualities. They didn’t fall as much as other asset classes.”

He says the issue for most investors is time and expertise. “If you have a practical asset allocation model, you should frequently be rebalancing it. A diversified multi-asset portfolio takes that out of your hands.

“It’s a form of discretionary management for many investors, but at a much lower cost,” he argues.

But James Davies, investment research manager at Chartwell, says the idea of a multi-asset fund has not really taken off with many financial advisers, who he says mistakenly “cling” to doing their own asset allocation.

He suggests a focus on achieving an absolute short-term return has also distracted many investors from the importance of longer-term diversification.

Even so, investors need to choose their multi-asset fund with care.

“There are multi-asset funds out there that have failed to deliver enough diversification, despite the dreadful market conditions,” says Davies.

He warns investors off the CF Midas Balanced Income fund, which has lost 31 per cent over the past year, as it had exposure to a number of areas that performed badly, such as banks, housebuilders and closed-ended funds of hedge funds.

However, Davies argues that truly diversified funds still have a role to play.

“It’s important not to criticise a whole investment approach simply because a number of people are not adding the value they should be. We believe that a multi-asset fund, or call it what you will, should sit at the core of the majority of investor portfolios.”

He suggests investors look for multi-asset funds that are diversified across asset type, geographic region and strategy.

Sometimes, these may not be funds that have multi-asset in the name. Davies cites Thames River Cautious Managed and HSBC Open Return as examples of multi-asset type funds – both have only lost about 9 per cent over the past year.

M&G’s Cautious Multi-Asset fund is the best of the bunch, outperforming the sector average for all other IMA sectors over the past year.

Fund manager David Jane aims to deliver low volatility and says the fund is suitable for newcomers to investment. He is currently moving out of foreign currency, gilts and defensive stocks and into index-linked bonds, corporate credit and gold.

But investors should be aware that they pay a premium for a multi-asset fund manager. Total expense ratios tend to be around 2.5 per cent – well ahead of the 1.5 per cent on more straightforward funds.