Multi-asset funds are useful tools for investors wanting a relatively simple way to put together a well-diversified portfolio.
These products will invest in a number of asset classes, such as equities and fixed income, rather than focusing on just one. This gives their managers much greater flexibility to select the most effective holdings to meet their overall investment objectives.
But what are the pros and cons of these funds and how do they work? Our guide to multi-asset investing reveals what you need to know.
What are multi-asset funds?
They are portfolios that can invest in a wider variety of asset classes. These will often include equities, fixed income, property and some alternatives. The idea of multi-asset funds is to generate diversification. This approach can help reduce the risk taken as you’re not so reliant on one area performing.
The hope is that losses suffered in one area will be counterbalanced by gains made
elsewhere. If equities have taken a tumble, for example, then hopefully fixed income is performing well.
However, it’s worth bearing in mind that the success – or otherwise – of these funds will be
determined by the skills of the managers at the helm.
Pros and cons
As with every investment, there are pros and cons when it comes to multi-asset strategies. The harsh reality is that no one fund is a guaranteed route to riches.
Potential upsides
● Greater flexibility to meet specific objectives
● An increased number of possible holdings
● Less risk than pinning all your hopes on one asset class
Possible risks
● Multi-asset funds will be run in different ways
● No guarantee that all managers will be successful
● Will the investment strategy meet your needs?
DIY approach to multi-asset investing
Of course, you can pursue a multi-asset strategy without taking a one-stop-shop approach focusing on a single fund. This would involve building your own overall portfolio by selecting various equity, fixed income and property funds, as well as some alternative investments.
The upside is that you get to choose the fund managers in each area. However, the downside is that this will require more research.
Multi-manager alternatives
Another alternative to a straightforward multi-asset fund are multi-manager portfolios, which invest in other funds, as opposed to individual assets. One of the main attractions of multi-manager is the increased diversification on offer, as each fund held will have invested in a number of assets.
However, you will still need to pay close attention to its objectives and holdings, as well as bearing in mind that these funds are usually more expensive.
Where can you find multi-asset funds?
The good news is there’s no shortage of multi-asset funds available – and a great place to start are the various IA Mixed Investment sectors. There are four such sectors, with each dictating the minimum – and maximum – equity investments that funds must have to qualify for inclusion. They are: IA Mixed 2 Investment 0-35% shares, IA Mixed Investment 20-60% shares, IA Mixed Investment 40-85% shares, and IA Flexible, which has no restrictions.
IA Mixed Investment 40-85% is currently the most popular, with UK investors having committed £88.4bn, according to recent data.
How to choose a multi-asset fund
So, how do you select a multi-asset fund? Well, the golden rule for choosing such a portfolio is the same as for any investment: do your homework. You need to be clear on your overall objectives and attitude to risk as these will govern the type of investments you can consider.
For example, if you’re opting for a fund in one of the IA Mixed Investment sectors, you’ll need to decide how much exposure you want to equities. In addition, the type – and number – of assets held by funds will vary enormously.
Therefore, you must carry out research on any funds that catch your eye. Here we highlight three multi-asset funds that may be worth a look.
BNY Mellon Multi-Asset Income
The aim of this fund is to achieve a stable income, with the potential for capital growth, over the longer term. This is an unconstrained and flexible multi-asset vehicle that benefits from tapping into Newton’s huge resources. We like how it combines Newton’s global investment themes with rigorous fundamental analysis. It’s also been a consistently strong performer since launching in 2015.
The portfolio is also very well diversified and typically holds between 120 and 140 securities, each of which is expected to provide an attractive return and income. Currently, it has 54.5% of assets in equities, 26.1% in bonds and 17.6% in alternatives.
M&G Episode Income
This fund invests directly in individual stocks and bonds – and can have real estate exposure by investing in property funds. It has two aims: to generate a growing level of income over any three-year period and provide capital growth of 2-4%, on average, each year over the same timeframe.
The name ‘episode’ refers to the periods of time when investors’ emotions can cause them to act irrationally and generate investment opportunities. The fund currently has 43.4% of assets in equities, 36.6% in government bonds and 16.3% in corporate bonds. We believe the M&G Episode Income fund is particularly interesting, now that the search for income has resulted in many investors chasing the same ideas.
Jupiter Merlin Income
Another suggestion is actually a multi-manager fund. This means it invests in other funds, as opposed to individual assets. However, this is a way of enjoying even more diversification, and the fact it’s managed by one of the industry’s most respected teams is a positive.
The fund has just under 30% of its assets in fixed income funds, as well as a similar amount in UK equity funds. It then has almost 22% in global equity funds, roughly 9% in Japanese equities, and the remainder split between alternatives – gold and property – and cash. This fund could be a good core holding for income seekers that are looking to have the hard work done on their behalf.
