Multi-asset funds may share a sector label, but their approaches to diversification, asset allocation and risk management can vary significantly. Understanding those differences is a key part of the research process.
Here are five questions worth exploring when assessing a multi-asset strategy.
1. Where does diversification actually come from?
The term “multi-asset” can mean different things to different managers. Some portfolios may primarily rely on equities and bonds, while others incorporate commodities, alternatives or other diversifying assets.
The key question is not simply how many holdings a fund owns, but whether those holdings are expected to behave differently under varying market conditions.
2. How are asset allocation decisions made?
Asset allocation is often one of the biggest drivers of long-term returns.
Understanding how a manager decides where to allocate capital can provide valuable insight into the investment process.
Is the portfolio built around long-term strategic views, short-term tactical opportunities, or a combination of both?
A clear and repeatable framework can often tell investors more about a fund than a single year’s performance numbers.
3. How much flexibility does the fund manager have?
Not all multi-asset funds are managed in the same way.
Some managers make significant allocation changes as market conditions evolve, while others maintain relatively stable exposures over time.
Tim Carr, Multi-Asset Investment Director at Schroders, has highlighted the importance of understanding how managers adapt portfolios in response to changing market conditions, including shifting interest-rate expectations, market concentration and geopolitical uncertainty.
Paraplanners should therefore seek to understand where active decisions are being made and how those decisions fit within the fund’s overall objectives.
4. How is risk managed?
Risk management should sit at the heart of any multi-asset strategy.
Questions worth exploring include:
- Is there a volatility target?
- How are concentrations monitored?
- What role do defensive assets play?
- How does the manager respond during periods of market stress?
The answers can help build a clearer picture of how the portfolio may behave when markets become more challenging.
5. What role is the fund designed to play?
Finally, it is important to understand what the fund is trying to achieve.
Some multi-asset funds are designed primarily for growth, others prioritise income, while some focus on delivering smoother returns through the market cycle.
Understanding a fund’s objective can help ensure expectations remain aligned with the outcome it is seeking to deliver.
Understanding the bigger picture
Multi-asset funds may sit within the same sector, but their approaches to diversification, asset allocation and risk management can vary significantly.
Understanding those differences is hugely valuable – the right questions can help build a clearer picture of how a fund is managed and whether it is likely to deliver on its stated objectives across different market environments.
Main image: question, mark-fletcher-brown-nN5L5GXKFz8-unsplash
