Multi-asset or "managed" funds are designed for advisers who can't be bothered to construct a balanced and varied portfolio for their clients, according to FundExpert’s Brian Dennehy (pictured)
The managing director believes investors are better off holding a portfolio of many different types of funds instead of concentrating on just one multi-asset product.
He added that cautious and balanced funds are currently popular due to a reluctance on the part of advisers to create a diverse collection of assets.
"They are best sellers because advisers can’t or won’t build focused, tailored portfolios – that being so you have to ask where advisers are adding any value," he commented.
"For a relatively small number of clients a one-fund solution might work – but certainly not in the scale these are sold."
While cautious and balanced funds are among the most popular with investors,
believes they should look to diversify their own portfolios.
"Why buy Jupiter Merlin Income
when you could buy Invesco Perpetual Income
plus M&G Corporate Bond
? Then you can choose the proportions per fund that more accurately reflect your attitude to risk," he said.
"You also have much greater day-to-day clarity about how the different asset classes are performing, which in turn vastly simplifies the ability to adjust the holdings over time."
"Not to mention the fact you would save on cost, with the Jupiter fund charging 2.3 per cent."
According to FE data, a 50/50 split between the Invesco Perpetual Income and M&G Corporate Bond funds would have beaten the Jupiter Merlin Income portfolio over one, three, five and 10 years, albeit with slightly more volatility.
Performance of fund vs portfolio over 10-yrs
Source: FE Analytics
||1-yr returns (%)
||3-yr returns (%)
||5-yr returns (%)
||10-yr returns (%)
|M&G Corporate Bond + Invesco Perp Income
|Jupiter Merlin Income
M&G Corporate Bond is already a hugely diversified fund, with more than 800 holdings. Its top-10 instruments only account for 8.66 per cent of assets under management (AUM).
Dennehy says that even multi-manager funds – which are marketed around their diversity – should be avoided by investors.
"Managed funds could be multi-asset, funds of funds or multi-manager. From the investor’s point of view, whichever the type, it means lack of visibility and more often than not higher charges," he commented.
The adviser also warned against paying too much attention to fund labels.
"A cautious label lulls investors into a false sense of security and has more to do with marketing than markets," he explained.
"The IMA’s sector puts emphasis on a fund’s equity exposure, but tells you nothing of risks in non-equity asset classes."
AWD Chase de Vere’s Patrick Connolly also thinks that multi-asset funds are best-suited to hesitant advisers, although he believes they have a place in some portfolios.
"I would agree with Brian [Dennehy] in principle, as a diverse portfolio of many funds is a better solution for most," he said.
"Investors should look into more specialist assets such as UK and global equities and certainly avoid the one-size-fits-all mentality."
"Saying that, managed funds do have a place in two main areas; firstly they are a key choice for investors who do not have enough money to adequately diversify their portfolio."
"Secondly, they are a strong type of all-in-one solution that means investors do not need to monitor and change their holdings all of the time."
Ben Willis, head of research at Whitechurch Securities, believes there is some truth in Dennehy’s claims, but sympathises with advisers perceived to be "lazy".
He commented: "There is an argument that managed funds mean other industry professionals are doing the outsourcing for advisers."
"This could be seen as lazy, but advisers have been shoe-horned into backing managed funds due to the amount of time they need to spend on lots of other types of financial services."
Rob Morgan, investment analyst at Hargreaves Lansdown, is a proponent of multi-asset funds and points to the success of a number of managers.
"Investors can find multi-asset funds with good managers who add value using strong asset allocation. For example Sebastian Lyon
who heads up Trojan
– a very flexible fund concentrating on gilts, commodities, equities and more."
Although Morgan can see why some people criticise advisers who recommend this type of fund, he believes the pros of this approach outweigh the cons.
"At the end of the day, asset allocation is difficult and if you find a manager with a proven track record of successful diverse portfolios, then it is appropriate and useful for both investors and advisers," Morgan said.
"They also eliminate the gargantuan task of putting together 20 to 30 funds for a client and constantly tracking them," he finished.