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Tapping into the expertise of multi-asset managed funds

insights
ASX
December 2014

Global fund managers’ multi-asset funds can offer an alternative for investors wanting to manage risk and return. We consider how they can help an investor meet their targets.

Well-constructed investment portfolios balance risk and return in equal measures by including a range of diverse assets. But selecting those assets – and varying their allocations in proportion to market conditions – is one of the most challenging tasks an investor will ever encounter.

Research shows that most investors consistently get it wrong: when markets fall, investors get scared and withdraw their funds but, when markets go up, they chase returns and pay too much. It’s an effect sometimes referred to as ‘dumb money’ because it’s the reverse of the popular investment axiom ‘buy low, sell high’.

Credit Suisse Investment Banking recently released data showing that US investors consistently earned 1-2 percentage points a year less than the average actively managed fund thanks to bad timing1.

There are a variety of behavioural finance techniques that can counter the ‘dumb money’ effect: focus on long-term returns rather than be swayed by short term results, focus on underlying investment fundamentals rather than emotion, and don’t overweight evidence that confirms pre-existing biases.

Another strategy involves employing global funds management firms to manage a portfolio. They can tap into their on-the-ground capabilities in offices around the world as well as ability to internally manage several asset classes or select best-of-breed external managers.

A number of these fund managers are available through the mFund Settlement Service, which allows investors to buy and sell units in unlisted managed funds. For example, Legg Mason offers two multi-asset funds through the service. 

Both funds’ asset allocations are managed dynamically in response to changing market conditions. For example, the Multi Asset Retirement Income Trust is currently at its maximum exposure (about 45 per cent) to Australian equities because of current strong equities yields, according to Will Baylis, multi-strategy portfolio manager at Martin Currie Australia (Legg Mason acquired Martin Currie in July 2014).

Baylis says it is particularly important that retirees maintain an exposure to growth assets in order to produce consistent income and fund a long retirement.

While bond rates fell post-GFC and have remained relatively low, equity dividends recovered and have lifted by 6.3 per cent a year over the past 15 years2.

“Volatility on income on term deposits was around 25 per cent from 2000 to 20103,” Baylis says. 

“The capital was absolutely stable but the income volatility was double that of ASX equities over the same time frame . The message for retirees is: don't think that a capital stable product is going to solve your requirements to meet the cost of living in retirement. If you go to 100 fixed interest or annuities you will quickly end up drawing down on your capital.”

However, not all multi-asset funds have the same goals. A traditional balanced fund splits its assets 70:30 between growth and conservative assets and generally aims for total returns 3-5 per cent above the rate of inflation.

That diversified mix of assets means that multi-asset funds tend to generate less volatile returns: they won’t outperform shares in a bull market but also tend to outperform cash and term deposits over the long-term.



1 Factset and Martin Currie Australia. Monthly data. 2000-2014 for S&P/ASX 200 Index.
2 RBA and Martin Currie Australia.   
3 ASX dividend volatility for S&P/ASX 200 Index, 2000 to 2010.  Source: Factset, Martin Currie Australia