Multi-asset funds have evolved significantly over recent years and now offer solutions appropriate to investors of all ages and risk tolerances, according to Aberdeen’s Scott Dakers and Mike Brooks. 
Developments such as the recent overhaul of the pensions system – which gave individuals greater freedom over how they can use their retirement savings – have put greater attention on multi-asset funds but the managers are keen to point out today’s products are more advanced than those of even 10 years ago.
While some investors may view multi-asset funds as a way to put the asset allocation between equities, bonds and cash into a professional’s hands, senior investment manager Brooks says they now do much more than this and therefore offer investors a multitude of benefits.
Dakers (pictured), deputy head of retirement and long-term savings at Aberdeen, says the key advantage to investors is that powers granted under regulations such as UCITS III and UCITS IV allow funds to hold assets such as derivatives, private equity and exchange traded funds.
This has broadened the opportunity set and allows multi-asset portfolios to give their investors exposure to a much wider range of underlying holdings and strategies that they would be able to get themselves. The key is to combine these to produce an attractive return profile while keeping volatility to an acceptable minimum.
Brooks said: “It’s important to realise that multi-asset investing has evolved over the last five or so years. If you go back 10 or 20 years, multi-asset investing meant a blend between equities, bonds – be it government or investment grade – and cash, often with the classic 60/40 spilt.”
“Now it’s evolved to have more asset classes with it, whether than be high yield bonds, emerging market debt or infrastructure. Prior to that, dampening down volatility meant move away from equities and into bonds or cash, which offered typically low returns; these days, diversifying across asset classes that have all have attractive return prospects can still keep volatility down.”
Aberdeen runs a number of multi-asset portfolios, including the flagship Aberdeen Diversified Growth fund, Aberdeen Multi Asset Conservative and three risk-targeted Aberdeen Multi Asset Growth funds. In keeping with the managers’ point, the funds hold much more than just equities and government bonds.
Aberdeen Diversified Growth’s current portfolio
Source: Aberdeen Asset Management, as at 30 Sep 2015
“The idea is to get that blend across so when you get these spikes in the market the effect in the portfolio has been dampened down,” Dakers said.
“If done well, multi-asset can get you equity-style returns with less volatility and for most people now it’s the volatility that causes the concern. If you’re only exposed to one asset class and you see it spike up or down 20 per cent, it can cause panic. The advantage of multi-asset is getting you the diversification across asset classes to dampen down volatility while maintaining a return at the same time.”
A look within Aberdeen Diversified Growth’s portfolio shows how a wide range of assets is drawn up by the firm’s team to achieve this aim.
While equities are the portfolio’s largest allocation at 28.1 per cent (as at 30 September 2015), Brooks categorises these as ‘enhanced low-volatility equities’. This particular strategy is a relatively new development for the fund and is part of the team's efforts to improve each asset class' risk/return pay off.
Within equities, Aberdeen's quantitative team builds a portfolio of stocks that targets three-quarters of the volatility of the index but with better returns by tilting towards factors such as value, financial strength and momentum.
“This is an example of how we try to improve the risk/return profile not only through asset allocation but how we approach each individual asset class,” Brooks said.
The team sees equities as being “broadly fair value” and likely to produce attractive returns going forward, but well publicised risks - such as the prospect of higher interest rates or a slowing Chinese economy - means that volatility is likely to persist.
The manager added: “At the same time, the normal safe havens of government bonds or cash are not offering attractive returns, so that means that we're seeing more opportunities in alternative investments so it makes sense to be diversified.”
Brooks highlights the fund’s renewable energy holdings – through vehicles such as Nextenergy Solar and The Renewables Infrastructure Group – as an interesting theme in the portfolio.
“These are producing very reliable revenue streams, partly from government subsidies and partly from selling power to the grid,” he said.
“They're offering mid to high single-digit returns but have very little economic exposure, so that's a way of generating equity-like returns but without the same risks. When we see equity markets sell off, things like this didn't sell off because their revenues weren't at risk.”
Insurance-linked assets – or funds that effectively allow the portfolio to take exposure to insurance risk against extreme natural events like hurricanes and earthquakes – are another diversifying strategy used by Aberdeen Diversified Growth.
“The attraction here is that you can earn returns of around cash plus 4 per cent over time, net of any expected losses and fees that might be incurred. Of course, there's a risk if there are any extreme events but even these are independent of the equity market.”
Exposure here is taken through the Catco Reinsurance Opportunities and Blue Capital Global Reinsurance funds.
Other diversifying strategies at play in Aberdeen’s multi-asset funds include absolute return strategies, property, infrastructure and private equity, as well as exposure to sovereign, investment grade, high yield and emerging market parts of the bond market.
This kind of diversification also means that multi-asset funds can be used by investors of all ages, not just those nearing or in retirement. While the consensus view is that younger people can have the bulk or even all of their portfolio in equities, Aberdeen believes multi-asset funds can play a key role from the very start of their investment horizon.
“The pension freedoms have really focused the individual on the point that this is really their money, whereas before it was seen as the pension scheme's money and somebody was contributing on your behalf. The government has now made it very clear that when you come to retire, that money is yours to do what you please with,” Dakers said.
“People now need to be more interested in what's happening with their assets. So while investing in equities over the very long term makes sense, people are still nervous about investment markets and a lot of young people are coming to this for the first time. If they see the market spiking by 120 points a day and their investments going down, they will get scared.”
“Some investors don't want to be put through that 'thrill ride' and just want their assets to perform. If you look at how we're running our range and especially the Diversified Growth fund, there’s an eye on risk but it also has an eye on return. We hope this means someone investing in it will have an idea of the targeted outcome, but also know that we'll dampen the volatility.”
The value of investments and the income from them can go down as well as up and your clients may get back less than the amount invested.