SINGAPORE (July 10): Multi-asset funds have become increasingly popular in recent years, as fund houses attempt to offer investors more bang for their buck. These funds invest not only in equities and bonds, but also in a range of other asset classes such as infrastructure projects, property, private equity and derivatives.

Do such funds have a place in investors’ portfolios? How are they useful? And are they more or less risky than traditional equity, bond or balanced funds?

Victor Wong, director of wealth management at Financial Alliance, thinks a multi-asset fund could serve as the foundation of an investor’s portfolio. “For investors who have a small investment amount or for someone who is not investment-savvy, a good multi-asset fund can be used as a core fund,” he says. This is because multi-asset fund managers can actively manage their positions by overweighting and underweighting asset classes or sectors according to different market conditions. “For investors who want a more income-orientated solution, a multi-asset income fund can also be a viable solution as fund managers can allocate monies to sectors with attractive yields on a risk-adjusted basis,” Wong adds.

“By investing in a multi-asset fund, investors are able to capitalise on market volatility by capturing market upside while preserving capital during a market downturn,” says Bank of Singapore investment strategist James Cheo. “Diversification through a multi-asset fund allows investors to achieve steadier overall returns over time, with any losses in one asset being compensated for by gains in another.”

Irene Goh, head of multi-asset solutions for Asia-Pacific at Aberdeen Asset Management, says depending on the asset allocation, multi-asset funds can be good all-weather portfolios. “Because our portfolios are truly diversified, we do not assume too much of a tactical view. Just by providing the strategic construction of being diversified and balanced across equities, bonds and alternatives, it provides natural downside-risk protection,” Goh says. “We do not have to try to be too smart and do tactical shifts across countries and regions.”

Aberdeen has two multi-asset funds within its stable that are available to Singapore investors. Both the Aberdeen Global − Multi Asset Income Fund and the Aberdeen Global – Multi Asset Growth Fund are diversified across three broad asset classes, with about a third of the funds’ holdings in equities, another third in fixed income and the remainder in alternative investments that include insurance-linked products, an absolute return strategy, private equity, property, infrastructure and special opportunities.

Aberdeen’s substantial allocation to alternative investments stands in stark contrast to other multi-asset products available in the market. As at May 31, the Investec Global Multi- Asset Income Fund, for instance, had a 60.1% allocation to bonds, 34.6% in equities and the remaining 5.3% in cash and other instruments. The Fidelity Global Multi-Asset Income Fund has a similar allocation. As at end-April, the fund had a 58.4% allocation to fixed income, 31.8% to equities and the remainder in other asset classes.

Goh says: “Everyone talks about diversification, but they are really looking only at investing in equities and bonds. We are considered very small in terms of the actual allocation in this space — only about 30%. Most other funds have an allocation of 40% to 50%, with the rest in emerging- market [EM] and high-yield debt. Maybe some credit as well. That’s really it in terms of diversification.

Such a wide array of asset classes may seem risky to the average investor, who may not understand them all. But Goh argues that many of these alternative investments offer higher yields with lower risks. She estimates that insurance-linked assets deliver total annual returns of 7% to 9%, aircraft leasing 10% to 12% and infrastructure 6% to 7%.“There could be other investments that generate the same yield as our fund, but our holdings come at a much better quality,” she says. “You can probably get similar yields with EM or high-yield debt, but you get better quality with our holdings because the loans are all secured on some form of collateral.”

Equities, bonds still staples However, most multi-asset funds still rely on fixed-income instruments to deliver stable returns to investors. John Stopford, head of multi-asset income at Investec Asset Management and portfolio manager of the Investec Global Multi-Asset Income Fund, says his fund generates quality yield by being selective about markets. “Within fixed income, we like higher-yielding but decent-quality markets such as Indonesia, Peru, Brazil and South Africa. We think these markets can benefit from ongoing disinflation and cautious market pricing.”

In the equity space, Stopford favours technology companies — particularly in markets such as Taiwan and China. However, he notes that few individual names currently satisfy the fund’s requirements for yield, sustainable balance sheets and capital growth potential.

The Investec Global Multi-Asset Income Fund aims to provide income with the opportunity for long-term capital growth by investing in a portfolio of fixed-interest instruments, equities and derivatives. The fund currently holds equities, EM local currency debt, developed-market sovereign debt, investment-grade corporate debt, high-yield corporate debt, EM hard currency debt, developed-market futures and developed-market interest rate swaps.

Are multi-asset funds too pricey? Because they hold such a variety of assets, multi-asset funds tend not to have a benchmark that is used to measure their performances. That can make it difficult for an investor to determine whether the fund is a good one, and whether the fund manager is earning his fees.

The Aberdeen Global – Multi Asset Growth Fund has an ongoing charge of 1.58% of assets, consisting of an annual management charge of 1.2% and other charges. The Aberdeen Global – Multi Asset Income Fund has an ongoing charge of 1.57% of assets. The Investec Global Multi-Asset Income Fund has an annual management fee of 1.25%.

Wong of Financial Alliance says: “The lack of a benchmark is not a problem, as most multi-asset funds are aiming for a more consistent return over a market cycle rather than seeking outperformance over an index. The fact that multi-asset funds can actively move and allocate [money] to different asset classes based on different market conditions means they are managed more like an absolute return fund incorporating risk management strategy.”

In fact, he thinks “more investors will gravitate towards more of such an absolute return strategy rather than a relative return strategy”. As to the question of costs, he says investors can make that decision by comparing fees across several funds.

“Investors are quite savvy these days and fund information is so easily available online. Thus, a fund manager who charges higher management fees may face the problem of attracting new monies,” says Wong. “Having said that, ultimately, it is still the net fund performance that is most crucial to an investor. Most people do not mind paying more if the fund manager can deliver superior performance compared with the funds’ peers.”

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