Many different types of multi-asset passive funds have been available for a number of years now, typically those that have a fixed weighting to a basket of assets that is thought to be in line with a certain risk profile.
There are also a number of lifestyling funds available through pension providers, which automatically shift investors’ asset allocation as they move nearer to and into retirement.
In theory these represent a simple, low-cost way for investors to handle their money, leaving all the asset allocation decisions to computers.
However Spear (pictured), says that both these strategies are flawed and that investors would be better off considering funds that use a forward-looking asset allocation strategy.
"There are a lot of different flavours of lifestyling funds. The basic scenario is you would want to invest in equities and then as you near retirement you would move into bonds, which is how a lifestyling pension works," he said. "You would move from higher risk into perceived lower-risk. The issue you have got is you may well be switching out of equities at a time when you should be switching into them."
"And you may be moving into gilts at a time when they are at their all-time high. You may not be reducing your risk, just changing it."
"If you had been lifestyling in 2008 into bonds you would have been laughing, but from 2009 when the markets moved up you would be switching out of equities at a time you should have been switching in."
Spear says the problem is that the asset allocation used by such products is backwards-looking, which means it is extrapolating from how assets behaved in the recent past.
There are a number of funds that have sought to address that problem that have been developed in recent years, he explains.
"Backwards-looking funds say if you had this asset allocation these are the returns you would have got at this level of risk," he said.
"The trouble is basing your asset allocation on past performance, whereas a forward-looking fund will take into account current conditions – for example, saying that at the moment you should not be in commodities, or you should be in Japanese equities."
These funds tend to work by getting their asset allocation from an expert source. In the case of the new L&G Multi Asset range this is the asset allocation views of L&G’s internal team.
In the case of the State Street Balanced Consensus fund it is taken from the asset allocation of the BNY Mellon CAPS Discretionary Portfolio Survey Median Fund ex Property.
The L&G range was only launched this month and is available on the Nucleus platform, while the State Street fund is currently institutional-only. Spear uses it in the Liverpool Victoria pension plan.
The fees are extremely low, with the State Street fund charging only 0.13 per cent per annum. The LV pension fund has charges of just 0.25 per cent.
Spear says that the investor gets the low charges of passives along with an active asset allocation that should allow the fund to beat the pure passives.
The L&G fund is particularly interesting as it invests directly in property too. Spear is considering using it in the future, although he says it is too early for that now.
There are other funds available that do a similar thing, such as the HSBC World Index series, which includes Cautious, Balanced and Dynamic options.
The funds are more actively managed, however, with the asset allocation decisions taken by a portfolio manager and implemented through a range of passives, largely run by HSBC.
Spear says that the costs are much less attractive though: the Balanced portfolio has ongoing charges of 1.47 per cent a year.
Performance of funds since Oct 2011
Source: FE Analytics
The obvious problem with this approach is that it depends on the manager making the right asset-allocation calls.
Spear says he used to use the Fidelity Multi Asset Strategic fund, but is less keen on it these days after it started to go off the boil last year.
Performance of fund vs sector over 3yrs
Source: FE Analytics
Another issue is that the risk rating of these funds can change quite considerably over time, according to the asset-allocation decisions of the manager.
This may not be such a problem for a private investor, who might not be following such ratings, but for the IFA it could cause problems.
Spear says that while the ingenuity of asset managers in providing new products is admirable, it creates a headache of its own.
"It’s very hard to be an IFA, or even worse, a private investor these days, because there is such a wide variety of strategies to choose from," he said.
