The mer­its of multi-as­set in­vest­ing in volatile and un­cer­tain times

Multi-as­set funds are pop­u­lar in­vest­ment ve­hi­cles. We dis­cuss why this trend to­wards multi-as­set in­vest­ing is a healthy devel­op­ment.

Finweek English Edition - - FUNDFOCUS - Pi­eter Koekemoer is head of per­sonal in­vest­ments at Corona­tion Fund Man­agers.

the ma­jor­ity of in­vestors and their ad­vis­ers con­tinue to place their faith in the South African multi-as­set class cat­e­gory. Hav­ing grown in pop­u­lar­ity in re­cent years, multi-as­set class funds now rep­re­sent more than half (51% as at end Septem­ber) of the Col­lec­tive In­vest­ment Schemes (CIS) in­dus­try as­sets com­pared to 29% five years ago, ac­cord­ing to data from the As­so­ci­a­tion of Sav­ings and In­vest­ment SA (Asisa).

This type of fund is de­signed to of­fer in­vestors a sim­pler in­vest­ment so­lu­tion – one with ex­po­sure to var­ied sources of re­turn and lower lev­els of risk due to broad di­ver­si­fi­ca­tion – and we believe this trend to­wards multi-as­set in­vest­ing is a healthy devel­op­ment, par­tic­u­larly amidst in­creas­ing un­cer­tainty and volatil­ity in mar­kets world­wide.

We ac­knowl­edge that in choos­ing the most ap­pro­pri­ate fund or com­bi­na­tion of funds much de­pends on the unique needs of in­vestors and the qual­ity of the in­vest­ment prod­ucts avail­able to them.

How­ever, for the ma­jor­ity of in­vestors an in­vest­ment in a cred­i­ble multi-as­set fund of­ten makes more sense than in­vest­ing in un­der­ly­ing build­ing-block funds. Our rea­sons are three­fold:

1. The op­por­tu­nity to achieve higher re­turns

As­set al­lo­ca­tion is the most im­por­tant de­ci­sion you make in in­vest­ments.

The ul­ti­mate value added by good as­set al­lo­ca­tion de­ci­sions dwarfs the al­pha that can be de­liv­ered in the un­der­ly­ing build­ing blocks. This is the big call and you need to get it right, so it makes sense to leave the as­set al­lo­ca­tion de­ci­sion to some­one who has the ap­pro­pri­ate skill set and ex­pe­ri­ence.

In ad­di­tion, there may be flaws in the way as­set al­lo­ca­tion de­ci­sions are made when fol­low­ing a build­ing-block strat­egy. For ex­am­ple, as­set class weight­ings may be re­bal­anced to cer­tain long-term tar­get weight­ings. Of­ten, this is rule-based and mech­a­nis­tic, with­out tak­ing into ac­count risk/re­turn con­sid­er­a­tions as rel­a­tive val­u­a­tion lev­els change over time.

Typ­i­cally, it is also per­formed fairly in­fre­quently. Given that the fu­ture is un­likely to look like the past, for­mu­lat­ing tar­get weight­ings based on his­tor­i­cal re­turns is a sig­nif­i­cant risk in our opin­ion.

Multi-as­set funds can make full use of all the as­set classes.

Of­ten the build­ing-block ap­proach in­volves a sim­ple al­lo­ca­tion to vanilla bonds, eq­uity and cash. Many of these funds end up with­out mean­ing­ful al­lo­ca­tions to im­por­tant as­set classes like prop­erty and in­fla­tion-linked bonds, and to some of the smaller as­set classes like com­mod­ity exchange-traded funds and pref­er­ence shares.

2. The op­por­tu­nity to bet­ter man­age – and thereby re­duce – risk

Risk is best man­aged by a man­ager who has sight of the over­all port­fo­lio. De­tailed knowl­edge of the ex­po­sures of the un­der­ly­ing build­ing blocks al­lows for a fuller un­der­stand­ing of the trade-off be­tween risk and re­turn.

For ex­am­ple, a do­mes­tic eq­uity build­ing block heav­ily in­vested in re­source stocks has very dif­fer­ent fun­da­men­tals to one heav­ily in­vested in rand-hedge dual-listed stocks. With­out that level of gran­u­lar­ity, man­ag­ing risk is al­most im­pos­si­ble.

Good multi-as­set fund man­agers spend enor­mous amounts of time:

Think­ing through the risk of un­in­tended po­si­tions that can oc­cur in the over­all port­fo­lio from views taken in each of the un­der­ly­ing build­ing blocks; and

Iden­ti­fy­ing the best risk-ad­justed re­turns across all as­set classes and sec­tors, and across the cap­i­tal struc­ture of ev­ery com­pany.

3. Multi-as­set funds can be tai­lored and flexed

This type of fund is de­signed to of­fer in­vestors a sim­pler in­vest­ment so­lu­tion – one with ex­po­sure to var­ied sources of re­turn and lower lev­els of risk due to broad di­ver­si­fi­ca­tion.

In the 1990s, the clas­sic bal­anced fund, with a risk bud­get re­flect­ing the requirements of typ­i­cal pre-re­tire­ment in­vestors, was all that was avail­able. How­ever, the early 2000s saw the launch of ab­so­lute re­turn multi-as­set funds, with risk bud­gets aimed at the typ­i­cal re­tired in­vestor.

In ad­di­tion, many man­agers now run be­spoke multi-as­set funds with risk bud­gets and re­turn tar­gets that dif­fer from the clas­sic pre- or post-re­tire­ment funds. For ex­am­ple, the Corona­tion Mar­ket Plus Fund has the abil­ity to in­vest up to 35% in off­shore as­sets and can have up to 100% in­vested in eq­ui­ties – more than the Reg­u­la­tion 28 lim­its ap­pli­ca­ble to re­tire­ment funds al­low. This makes it ideal for dis­cre­tionary in­vestors who are not sav­ing within a re­tire­ment ve­hi­cle.

The sig­nif­i­cant al­lo­ca­tion of cap­i­tal into multi-as­set funds is a healthy devel­op­ment in the South African mar­ket. It is a mar­ket that is fairly unique in global terms, as it has quite a few man­agers with good track records in both as­set al­lo­ca­tion and se­cu­rity se­lec­tion.

In the years ahead, if ex­pec­ta­tions of lower real re­turns prove cor­rect, al­pha be­comes a must-have and not a nice-to-have. For this, ac­tive as­set al­lo­ca­tion is needed – and a cred­i­ble multi-as­set class fund can pro­vide it.

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