Multi-Asset Funds

Multi-asset funds play a crucial role in building diversified investment portfolios, making them a key topic for financial advisers and exam candidates alike. By spreading investments across multiple asset classes, these funds can balance risk and return, catering to different risk profiles and financial goals. This article discusses the benefits, drawbacks, and practical uses of multi-asset funds—essential knowledge for those preparing for any of the CII R02, R06, J10, AF4, and AF5 exams.

This article is correct as at 5 November 2024.

Multi-asset funds invest across a range of asset classes, including cash, fixed-interest securities, and equities. Funds can be matched to specific risk profiles by adjusting the asset allocation, i.e., the balance between equities, fixed-interest and cash.

These funds typically fall under the ABI Mixed Investment sector categories:

Mixed Investment 0-35% Shares (up to 35% in equities);
Mixed Investment 20-60% Shares (20% to 60% in equities);
Mixed Investment 40-85% Shares (40% to 85% in equities); and
Flexible Investment Sector (no set limits on equity investments).

Advantages of Using Multi-Asset Funds

There are a number of potential advantages for advisers and their clients of incorporating multi-asset funds within an investment portfolio. These include:

Diversification: Multi-asset funds provide exposure to a range of asset classes. This diversified approach helps reduce the overall risk of the portfolio as it spreads investments across different markets and sectors, minimising the impact of underperformance in any one area.

Effective Risk Management: By balancing assets with varying levels of volatility, multi-asset funds can help protect clients from sharp market fluctuations. This makes them a great option for clients who want to reduce the risk of significant losses, especially during periods of market instability.

Tailored to Risk Preferences: With different allocations between equities and fixed-interest securities, multi-asset funds can cater to a variety of risk profiles. Whether a client is risk-averse or looking for higher growth potential, there’s a fund that can be matched to their specific financial objectives and risk tolerance.

Expert Portfolio Management: Multi-asset funds are professionally managed. These managers continuously monitor and adjust the asset allocation in response to market conditions, saving clients the complexity and time commitment of doing it themselves.

Cost-Effective: Clients can access a well-diversified portfolio through a single multi-asset fund, which can often be more cost-efficient than investing in individual investments across different asset classes. This can lower overall transaction fees and management costs.

Balanced Growth and Income Potential: Multi-asset funds can offer a combination of capital growth from equities and stable income from fixed-interest securities. This makes them a versatile solution for clients seeking either long-term growth, regular income, or both.

Simplicity and Convenience: By offering a diversified portfolio within one product, multi-asset funds simplify the investment process. Clients can achieve their desired asset mix without the need to manage multiple investments, making it easier to stay on track with their financial goals.

Disadvantages of Using Multi-Asset Funds

There are, of course, some potential disadvantages for advisers to consider, including:

Limited Tailoring: Multi-asset funds come with pre-set asset allocations, meaning clients have less control over the specific assets in the fund. While they can choose a fund based on their risk tolerance, they won’t be able to tailor the exact proportions or specific investments, which may not align perfectly with their personal preferences or objectives.

Potential for Lower Returns: The diversification of multi-asset funds can limit the potential for growth. Since these funds include more stable assets like bonds or cash, they may not perform as strongly in rising markets as funds that focus solely on high-growth assets like equities.

Higher Management Fees: Multi-asset funds often come with higher management fees compared to passive investment products, such as index funds. This can eat into overall returns.

Diluted Performance: While diversification can reduce risk, it can also dilute performance. If certain asset classes within the fund perform well, the overall return may still be dragged down by underperforming assets.

Complexity in Comparing Performance: Multi-asset funds can be harder to compare across providers due to differing asset mixes and management strategies. This can make it challenging for clients and advisers to determine which fund is performing better or offers better value in the long run.

Potential for Overlap: Clients who already hold individual assets or other funds in their portfolio might inadvertently double-up on some holdings, particularly with large-cap equities or bonds. This overlap can reduce the effectiveness of the fund’s diversification benefits.

Dependence on Fund Manager: The performance of a multi-asset fund is largely dependent on the skill of the fund manager in making the right asset allocation decisions. If the manager misjudges market conditions or makes poor choices, the fund could underperform.

Summary

In conclusion, multi-asset funds offer a balanced approach to investing, providing diversification, risk management, and professional oversight in a single product. While they come with certain limitations, such as reduced tailoring and potential for diluted performance, they can be an effective tool for clients seeking steady growth and protection from market volatility. As with any investment decision, it’s crucial to weigh the advantages and disadvantages to ensure any multi-asset funds recommended align with a client’s overall financial goals and risk tolerance.

Grab the resources you need!

If you’re studying for your CII AF4 exam, and you’re wanting some extra practice, grab our free taster to try out one of Brand Financial Training’s resources for yourself. Click the link to download the AF4 mock paper taster now!

Alternatively, you can download taster resources for AF5, J10, R02 or R06 if one of those exams is of concern to you.

Multi-Asset Funds Explained: Key Advantages and Disadvantages