Multi-asset funds take pole position

Because of continuing volatility in the global market, the multi-asset fund’s fan club appears to be growing by the day as the appetite for risk products among investors remains low.

As the three Adviser Fund Index (AFI) benchmark indices experienced another week of frantic activity, investors seem increasingly drawn to investment vehicles offering small but steady returns. This is reflected in the popularity of the Cautious Managed sector that the Investment Management Association (IMA) announced. It saw inflows of £465.7m in the fourth quarter of 2007 and was the most popular sector for the year overall, accounting for £1.6 billion of total net sales.

The FTSE 100 index of leading shares jumped 3.5% on February 12, after Warren Buffett, chairman of Berkshire Hathaway offered to buy $800 billion of municipal bonds from three American insurers. But the initial optimism did little to quell investor concerns as news came through that the offer had been rebuffed by two out of the three.

The continuing aversion to risk helps to explain the increasing number of funds being launched using a multi-asset approach. The funds diversify their portfolios by including stocks from across the asset class spectrum, aiming to negate the effects of falls in any one sector and ensure a smooth level of returns.

Kypros Charalambous, associate director at Barclays Wealth and AFI panellist, says 2008 could be the year that sees multi-asset funds come to the fore, as they have in America.

“Within my [AFI] selection I hold the SVM Global fund, which uses a multi-asset approach,” says Charalambous. “At Barclays Wealth, we are already some way down the line of utilising the benefits of multi-asset portfolios, increasing our weightings in assets such as hedge funds and property.”

Charalambous says that the continuing volatility in global markets has lessened the attractiveness of equities in the short term and increased the need for diversification.

“We’ve gone neutral on equities. We’re waiting to raise cash and increasing our alternative weightings. We’ll see what happens over the next few weeks before we start buying again.”

Other panellists agree with Charalambous’s optimism on the multi-asset approach. Darius McDermott, managing director of Chelsea Financial Services, says that the funds are in keeping with the increasing desire among investors to avoid risk.

“We put the HSBC multi-asset Open Global Return fund into our AFI portfolio in the November rebalancing,” says McDermott. “We predicted that there would be greater volatility in the markets and the fund fitted with our intention of taking risk off the table.”

The HSBC fund was down 0.65% over three months compared with the IMA Balanced Managed sector average, which was down 7.64% in that period. The strong results, McDermott says, mean the funds are becoming more attractive across the sectors.

“The multi-asset class approach may have a place even where it perhaps wouldn’t have been expected, such as in the aggressive index, given market volatility,” he says.

New research from Santander Asset Management UK found that 49% of the 1,020 investors surveyed were unsure about which asset class would do best in 2008. In these conditions the funds’ quantitative approach could prove particularly beneficial for nervous investors, clearly illustrating how the funds aim to produce the steady returns they promise. By diversifying the portfolio, the funds aim to take advantage of growth wherever it emerges.

Patrick Armstrong, co-manager of Insight Investment’s multi-asset UK Diversified Target Return fund, says this does not guarantee that the funds will be completely unaffected by a period of high volatility.

“In the short term, if everything falls off a cliff together it can have an effect on multi-asset portfolios,” he says.

If the volatility in the market is severe, traditional correlations between asset classes can cease to function. This increases pressures on the managers of the funds to be discerning in their stock selection and put an emphasis on good-quality stocks over well-performing sectors.

Despite this, Armstrong says the appeal of the funds when investors are risk averse is that risk management lies at the very core of a multi-asset portfolio.

“The advantage [of multi-asset] is that it is not reliant on skill, but on a combination of risk premia. Skill, when it works, will give steady returns, but when it hits problems can fall rapidly,” he says.

Armstrong gives the BlackRock Absolute Alpha fund as an example of a portfolio that relies on skill. The BlackRock fund also aims to deliver a smooth level of returns using pairs trading, where a long position is hedged by a short position that is strongly correlated to make the positions market-neutral.

“Unlike many absolute return funds, it has done exactly what it said on the tin,” says Tony Stenning, managing director of UK Retail at BlackRock. “Month to date, the fund is up about 20 basis points, in line with our aim of a steady increase.”

Over the last year, the Absolute Alpha fund has delivered returns of 10.4%, while the SVM Global and HSBC Open Global Return funds posted a fall of 0.2% and a rise of 4.0% respectively. Armstrong’s portfolio, including the BlackRock fund, had returns of 4.9% over the same period.

The Adviser Fund Index series comprises an Aggressive, Balanced and Cautious index each tracking the performance of portfolio recommendations from a panel of 19 investment advisers. For each risk profile, all panellists specify a weighted portfolio of up to 10 funds from the authorised UK unit trust and Oeic universe that, when aggregated, define the constituents and weightings of the three AFIs (see