It is funny to see that managed funds, in all their guises, are the new sexy things in the fund industry. It seems that we have come full circle since the days of the traditional managed funds and, along the way, we have seen fund managers indulging investors - and themselves - in niche and esoteric products that were only ever going to have a limited shelf life.  Small-cap European technology funds may have had their time in the sun but boy, did they become unpopular as the nineties gave way to the noughties.

A lost era for asset allocation

In all the excitement of rewarding equity markets through the 1990s, led by the mighty US, asset allocation skills became an endangered species. Who needed cash and bonds when stocks generally pointed upwards? And doesn't inflation wipe out your real return from fixed income anyway?

The 2000s ushered in a harsher era for equities. As markets were still digesting the TMT boom and bust, the tragedy of 9/11 was the catalyst for an era of pro-active monetary policies to support the global economy. With developed market interest rates set in a much lower range than the current generation of investors was used to, the temptation to feast on cheap money culminated in the global financial crisis in 2008. Interest rates have been lodged at emergency levels ever since.

Navigating equity markets was a more challenging exercise through these years and many investors found out that they didn't have the stomach for such a high level of risk. They also eyed government bonds investors with envy, as the asset class justified its reputation as the ultimate safe haven. As we live on with the ramifications of a global debt overhang, certain parts of the fixed income market have provided generous returns to investors, with rates still locked down at close to zero. How long this persists is clearly the debate of the day, and markets are responding to prospect of the US rates ‘lift-off’ with trepidation.

And a new era for solutions

This rapid trip down memory lane serves to explain, to some degree, why managed/multi-asset funds have returned to the spotlight.  Many investors simply lost their confidence and opted to delegate the day-to-day job of running money to full-time professionals.

The other important parts of this equation are the changes to the regulatory environment and the introduction of greater pension freedoms.  These forces for change in the world of financial planning have made the advisers’ role more complex, meaning that business processes need to be as efficient as possible.  With investments just one part of an adviser’s overall service proposition to a client, the fund industry needs to provide solutions that are trusted, understandable and easily mapped to investors’ attitudes to risk and investment goals.

Indeed, fund managers have responded to the opportunity by launching many new products, particularly of the ‘multi-asset income’ variety.  Looking at the statistics in Investment Week (sourced from Morningstar Inc), the number of funds in the Mixed Investments 20-60% Shares sector has moved up from 114 to 134 over the past three years.  For the Mixed Investments 40-85% Shares sector, the number has moved up from 116 to 132.

How to see the wood from the trees

Wonderful as it is to have the luxury of choice, making an appropriate selection is becoming a more troublesome task.  At The Adviser Centre, we know many of the long-standing managed propositions well and we have also been looking at the newer kids on the block.

When we are looking at a new multi-asset proposition, a couple of questions are at the forefront of our minds:

• Most importantly, what is the fund manager claiming can be achieved? 

We have seen some fantastical investment objectives and targets cited over the years and, sadly, there are still some around these days.  Always remember where interest rates and economic growth levels are today – income delivery and capital growth expectations must be calibrated for the world we are in.  If a fund is targeting that magical 5% p.a. income, ask how this is being done, what risks are being taken to get there and the extent to which capital is being put at risk as a result.

Making claims about limiting capital volatility should also be carefully tested – is this hoped-for outcome a residual of an innately conservative portfolio, is it a function of diversification or are derivative strategies used overtly to protect the portfolio?  How much do protective strategies cost?  We all know that diversification and hedging strategies sometimes fail to perform their job as expected – is the fund manager open about this and can the process be observed through periods of market stress?

• What is the asset allocation structure?  Is there a framework or do the managers have a free rein?  What is their asset allocation heritage?

History is littered with asset allocation shipwrecks.  In truth, very few managers are good at asset allocation and a number of those who are really good have probably retired.  Is the fund organised around a structural asset allocation framework and/or a risk budget, or is it a flexible offering?  Not many would have willingly held government bonds over the past few years without a framework forcing them to do so, or a strong sense of risk diversification telling them that they needed an offset in the portfolio in case their base scenario proved incorrect.

Asking these questions can help to see the wood for the trees when looking through the myriad of managed/multi-asset funds that are available, but we do not pretend that the task is straight-forward.  As always, look for relevant manager experience and resources that are appropriate for the task in hand and be very wary of overly-ambitious claims, tempting as they may appear.  If it looks too good to be true, it probably is.  Also remember that, sometimes, the simplest fund structures are the best – they are easier to explain, less complex and usually cheaper to manage and they often have a funny habit of delivering better results.

Matching retirement needs with fund solutions

• Income priority

For some retirees, the delivery of a regular, maximised level of income is the absolute priority.  Such investors need to accept capital volatility in return for this high yield.  Fund examples: Aberdeen High Yield Bond, Artemis High Income, Invesco Perpetual Monthly Income Plus.

• Income and capital growth

For investors who are approaching retirement or in early retirement, they may be seeking a regular income but still wish to see growth of their capital.  Fund examples: Artemis Monthly Distribution, Fidelity MoneyBuilder Balanced, Henderson Cautious Managed, Investec Cautious Managed.

• Capital preservation

For those who are fortunate enough have sufficient income or access to funds and wish to grow their nest-egg whilst protecting the downside as far as possible, we suggest risk-diversified, multi-asset funds.  Fund examples: Aviva Investors Multi-Strategy Target Return, Invesco Perpetual Global Targeted Returns, Standard Life Investments Global Absolute Return Strategies.

Article written by Gill Hutchison, Head of Investment Research, June 2015

Article featured on Adviser Hub website (June 2015)