Multi-asset funds - Offering mass-tailored solutions to investors

Asset management firms are exploring the need to offer multi-asset portfolios. By addressing certain issues, the firms can make offerings more meaningful.

Asset management firms are increasingly creating products that offer mass-tailored investment solution to retail investors. Such products are a far cry from the familiar single-asset-class offerings from asset management firms. But do multi-asset-class products provide comprehensive exposure to investors to achieve their objective?

This article explains the advantages of investing in a multi-asset fund. It then discusses issues related to such investment to show whether such products are appropriate for investors.

An individual wanting to replicate a multi-asset fund portfolio can do so with relevant single asset-class funds.

An individual, for instance, can buy an active equity fund, a bond fund and gold ETF in the proportion of 75 per cent, 15 per cent and 10 per cent respectively.

There are, however, two advantages — tactical allocation and taxes — that a multi-asset fund portfolio offers over the replicated portfolio. Consider tactical allocation. This refers to taking advantage of short-term price forecasts in asset classes — taking profits in equity, for instance, when the valuations are stretched and investing the money in bonds and gold. It is not unreasonable to assume that a professional money manager is better placed than an individual investor to engage in such strategies.

An individual has to pay tax on her investments in a multi asset-class fund portfolio only if she redeems the units within 12 months. A multi-asset fund portfolio is, hence, tax-efficient.

A fund's objective is typically to “invest for capital appreciation”. Such a broad investment objective causes problems, as a fund follows style tilts, especially for its equity exposure. That is, a fund may have large-cap equity bias in one period and tilt to mid-cap bias in the next. Many investors believe that the investment style is not important as long as the fund beats its benchmark index.

That is not entirely correct for two reasons. One, a fund with style tilts can have a questionable benchmark. Evaluating and choosing a multi-asset fund with active diversified equity exposure could, hence, pose problems when there are many such offerings in the market. And two, investment style defines the portfolio's risk exposure. Large-cap stocks typically have lower risk than mid-cap stocks. A portfolio that moves from large-cap bias to mid-cap bias may be assuming more active risk than what the individual requires to reach her investment objectives. An active fund deviates from the benchmark index in a bid to outperform the index. Active risk refers to the risk that such deviation may sometimes result in underperformance.

The next concern is to do with the structure of multi-asset fund portfolios. Our preferred structure is to have a core-satellite approach; the core portfolio has a passive exposure to equity and bond and the satellite portfolio has active exposure to equity and passive or active exposure to commodities. The multi-asset fund portfolio combines passive and active exposure within a single portfolio which is not always cost-efficient, as the investors pay active fees for near-passive exposure as well.

It is heartening to note that asset management firms are increasingly offering multi-asset portfolios to investors. It would, however, serve the investors better if such offerings allow both passive and active variants along with distinct style exposure to equity and bonds.

This would enable investors to optimally use a mass-tailored product to reach their investment objectives.

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