Multi\-asset funds have been among the Investment Association's best\-sellers in recent years. Advisers have been lured towards multi\-asset portfolios for several reasons, such as the virtues of diversification in terms of assets and geography, the benefit of having a manager make asset allocation decisions and risk mitigation. But what makes for a good multi\-asset portfolio? How does one manage the expectations of the client against the will of the manager of the portfolio? How can advisers keep tabs on style drift or an incremental uplift in the risk of the fund? Moreover, some have asked whether providers could create lower\-cost multi\-asset portfolios to make it more cost effective for the end investor. This report aims to highlight some of the pros and cons of using multi\-asset portfolios. It qualifies for 30 minutes' worth of structured CPD.

Advisers choose multi\-asset portfolios for diversification

Diversification has been cited as the prevailing reason for advisers choosing multi\-asset funds for their clients. Outweighing other considerations such as potentially higher cost or even the rise of risk\-rated multi\-asset funds, advisers taking part in a poll from FTAdviser Talking Point claimed diversification was the main reason why they were recommending multi\-asset funds. Over April, advisers were asked what were their reasons for choosing multi\-asset portfolios; the vast majority said the benefit of having a manager choosing the right funds, stocks and sector allocations across all asset classes was an overwhelming reason for putting clients in such funds.

> Many investors continue to take risk off the table and either diversify their portfolio through multi asset funds or seek the safety of fixed income.

This coincided with a guide from Defaqto, sponsored by Prudential, which found investors were also drawn to multi\-asset funds because of the simplicity of them. The guide said: "For the investor the benefit of these types of funds is the simplicity of them, as it is possible for a client to invest in the same family of funds throughout their investment lifecycle. "Younger investors in the accumulation phase would be expected to use the higher risk funds in the family, with their corresponding higher levels of expected return. "Older investors approaching retirement or already in the decumulation phase will tend to use the lower risk funds, accepting their probable lower expected returns."

But while FTAdviser TalkingPoint's Twitter poll found cost was not a reason for choosing such funds \- perhaps because of concerns these could be more expensive to manage than a single strategy fund \- the Defaqto report suggested the popularity of such portfolios could see costs start to come down for multi\-asset funds. Catriona McInally, investment expert at Prudential, commented: "Demand for cost\-effective multi\-asset funds is high as investors understand more and more that costs will detract from performance. "These types of funds can fit into an advisers proposition and demonstrate how investment strategies can be altered to meet a clients changing circumstances." The poll reflected sales data from one of the largest fund platforms, Fidelity FundsNetwork, which revealed huge swathes of money flowing into multi\-asset funds earlier this year. According to sales data, the Investment Associations's mixed investment 40\-85 per cent shares sector led the pack in February in terms of inflows, followed by the mixed investment 20\-60 per cent shares and mixed investment 0\-35 per cent shares sectors. At the time, Paul Richards, head of sales for FundsNetwork, commented: It is clear advisory firms and their clients have become increasingly wary of the market euphoria and how much further the current bull run has left to go. "With plenty of things having the potential to spook market sentiment in 2017, we perhaps unsurprisingly saw many investors continue to take risk off the table and either diversify their portfolio through multi asset funds or seek the safety of fixed income. "This was evidenced by the number of multi asset and fixed income funds that appeared in our bestsellers lists in February." _Simoney Kyriakou is content plus editor for FTAdviser_

CPD: How to advise on multi\-asset funds

**Historically low bond yields and surging equity prices have made life even tougher for financial advisers, particularly in todays environment of heightened political uncertainty and fierce regulatory scrutiny.** Many in the profession have responded to this tricky backdrop by outsourcing investment decisions, placing wealthier client money in the hands of discretionary fund managers and smaller pots in off\-the\-peg multi\-asset vehicles. According to a poll conducted by Russell Investments, this year almost three\-quarters of advisers plan to use more of these ready\-made products, which are designed to achieve specific goals by investing in a globally diverse mix of assets classes within one portfolio. Judging by data from Fidelitys FundsNetwork, showing that mixed asset funds attracted 813m of net retail inflows in February, that trend already appears to be in motion. With plenty of things having the potential to spook market sentiment in 2017, we perhaps unsurprisingly saw many investors continue to take risk off the table and diversify their portfolio through multi\-asset funds, said Paul Richards, head of sales at FundsNetwork, in response to the platforms latest findings. **Diversification necessary** Open up a newspaper or your favourite news website and there is a decent chance that the main headline will feature either Brexit, political uncertainty in Europe or a controversial comment made by US President Donald Trump. Seasoned investors are becoming increasingly jittery about these potentially devastating risks and the glaring fact that they are no longer reflected in the majority of stockmarket valuations.

> We perhaps unsurprisingly saw many investors continue to take risk off the table and diversify their portfolio through multi\-asset funds

Against a backdrop of global trade uncertainty, indices have soared to unprecedented highs. That scenario has prompted plenty of scepticism from market commentators, some of which argue that a wild case of misguided optimism has wiped out what little value was left in traditional asset classes. These warnings help to explain why 63 per cent of advisers, when asked in a recent FTAdviser poll why they are pursuing multi\-asset strategies, said they are keen to achieve greater diversification. Based on this response, it would appear that many in the profession agree that filling client portfolios with a random selection of easily accessible equity and bonds just wont cut it any more. **Playing it safe** Although unlikely to achieve Warren Buffett\-like returns, spreading risk across numerous asset classes can give advisers peace of mind and protect them from regulatory scrutiny if client portfolios fall into the red. The Sage of Omaha once claimed that diversification makes little sense if you know what you doing. Yet when dealing on behalf of others, it is perhaps wiser to invest in a wider net of assets, at least to ensure that when some underperform others will be there to compensate. The best way to manage investment risk in an investment portfolio is by adopting a multi\-asset approach, says Patrick Connolly, certified financial planner at Chase de Vere. Ideally investors will want to invest in a range of assets which will each reward them in the long\-term, but where they dont all move up and down together in the short\-term. **Spoilt for choice** Not too long ago, multi\-asset funds generally only offered access to stocks and bonds. Gradually throughout the noughties a number of more esoteric asset classes, such as property, loans, currencies and commodities, were added to portfolios. Their rise in popularity these days it seems that one is launched every week means that advisers are no longer short of options. Growing competition, and a recognition that stockmarkets are now vastly different to how they were when these funds were first launched in the 1970s, have seen providers concoct all kinds of wacky ideas to outfox rivals and achieve better returns for clients. This environment represents great news for retail investors, especially as many of the asset classes that are now popping up in these funds were previously not readily available to them.

> We have seen increases in advisers delegating investment selection to ensure they can demonstrate a centralised investment process

In theory, wider choice presents greater possibilities to spread bets, hone in on certain trends and tap into areas that are overlooked and, consequently, provide potentially better value for money. **Financial planning made easier** In many cases, multi\-asset funds are arguably also easier for advisers to pitch to clients. Over the years, investors have grown tired of hearing about funds beating benchmarks, preferring instead to be given specific, more comprehensible targets. Vehicles such as absolute return funds, which attempt to deliver positive outcomes regardless of the market environment, have gone down a storm, partly because they offer a clearer description of their objectives. Regulatory challenges can potentially be eased by using multi\-asset funds, too. Since the Retail Distribution Review was introduced back in 2012, financial planners have been under increasing pressure to ensure that investments are consistent and always reflective of client risk appetites. By outsourcing to fund houses, advisers are better positioned to satisfy demands calling for more standardised approaches. Provided they hold up their end of the bargain, advisers can also reduce the risk of getting into hot water with regulators when investments go sour. From our own research we have seen increases in advisers delegating investment selection to ensure they can demonstrate a centralised investment process, says James Rainbow, head of UK financial institutions at Schroders. Against that backdrop, it is hard to argue that a professionally managed, consistently executed and regularly reviewed investment strategy is anything other than a good thing for a client. **How best to spend your time?** Another key concern is time. A growing number of financial advisers agree that the current environment has made it increasingly difficult for them to build worthy portfolios capable of withstanding regulatory scrutiny in a seven\-day week. Mindful that constantly researching and documenting suitable, regulatory\-friendly investment opportunities would rob them of the precious time they usually spend with clients, many advisers now believe that their best bet is to focus on the financial planning aspects of their job. It is an easy solution for advisers to select multi\-manager funds or investment propositions, says Mr Connolly. In many cases this makes sense for them, as they dont have the resources or expertise to construct and manage investment portfolios and can focus their time on financial planning and managing client relationships, which is where they can probably add most value. Nick Peters, portfolio manager at Fidelity International, agrees, adding that advisers should leave stock picking to the experts and instead concentrate on what they do best, such as assessing client attitudes to risk and tax planning. The multi\-asset team here have active research on 239 strategies from 101 different investment management companies, he says. That research includes detailed quantitative and qualitative analysis, with the analysts often having the chance to meet portfolio managers and the wider team face to face. That level of research is difficult to replicate. **Risk profiling** Given the amount of attention that regulators have placed on investment suitability, a growing number of advisers now feel their safest option is to get clients to fill out a questionnaire, often provided by fund houses, detailing how much risk they are willing to take on. Once the process is complete, advisers can then cross\-reference the results with a list of relevant products. The risk profiling and risk rating tools which have emerged in the financial advice industry have made it easy for advisers to match up clients with multi\-asset funds which have the appropriate risk categorisation, says Laith Khalaf, senior analyst at Hargreaves Lansdown. This has coincided with advisers seeking to outsource asset allocation decisions, which is essentially what a multi\-asset fund does for them. The risk of this approach is it reduces risk to a single figure, which is really a gross oversimplification, and that investors and advisers rely too heavily on this one magic number. Mr Connolly made a similar warning, urging his peers to dig deeper and always calculate additional costs associated with the fund that emerges as most appropriate. Advisers who do recommend multi\-asset funds or propositions need to ensure that they arent exposing their clients to excessive charges or shoehorning them into a one\-size\-fits\-all approach, which might not be entirely suitable, he says. **Success rates difficult to gauge** After drawing up a shortlist of funds that match a clients risk profile, advisers then have their work cut out to ascertain their individual worthiness. Unlike regular funds, multi\-asset products are often housed in random sectors, such as Flexible or Unclassified, that arent benchmarked to a particular index. Given their diverse nature and relatively new status in the industry, comparing them to peers and measuring past performance can be tricky.

> The risk of this approach is that it reduces risk to single figure, which is really a gross oversimplification, and that investors and advisers rely too heavily on this one magic number

As with any type of fund, there are examples of both good and bad performance, says Mr Khalaf. However, the sector is so new there are few funds with long enough track records to justify investment. The task of assessing performance can also be difficult for advisers due to the lack of appropriate benchmarks. **Cheap or expensive?** Another potential hurdle could be cost. Some products, including multi\-manager funds, have attracted plenty of scrutiny for the amount they charge customers. Rather than invest directly in an assortment of assets, multi\-manager vehicles gain exposure to desired areas by buying into other funds. The trade\-off for this additional diversity is an extra layer of fees, as clients are forced to fork out the multi\-managers costs, on top of the charges associated with the various other funds that appear in the portfolio. These additional fees naturally eat into returns. Fortunately, there are cheaper options out there for cost\-conscious investors keen to pursue multi\-asset strategies. Charges tend to vary greatly, which is why Mr Rainbow claims that it is unfair to label all these funds as expensive. Multi\-asset covers an enormous waterfront from active to passively managed funds, those directly invested to those run on a fettered and unfettered fund of funds basis, he says. In this very wide range, you find a similarly wide range of costs, ranging from 20 basis points to something approaching 200 basis points. On this basis, it is hard to label every one of these funds expensive. Robin Keyte, director of Keyte Chartered Financial Planners, agrees that multi\-asset products can provide a cheap way for investors to gain access to various different asset classes. However, when it comes to managing larger pools of money, he believes that better value maybe found elsewhere. For smaller investments this \[multi\-asset investing\] is helpful as it offers a well diversified investment approach, without the cost of using multiple funds and any associated dealing charges, he says. For larger investments the potential disadvantage is cost, whereby the annual ongoing charge for such a multi\-asset fund is higher than the overall annual charge for a portfolio of individual funds. _Daniel Liberto is a freelance financial journalist_

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