Deciding if a multi-asset fund is right for you

Many investors I speak to have never considered investing in a ‘multi-asset fund’, often due to a lack of understanding or simply because they are not familiar with the concept.

Multi-asset funds may not be as sexy and exciting as individual stocks, but I believe they are a suitable investment opportunity for a broad range of investors who are looking to gain diversified exposure to financial markets.

And with the advent of ASX mFund Settlement Service, retail investors are able to access these products via an online broker such as nabtrade.

What are multi-asset funds?

Multi-asset funds typically focus on a diverse range of investment opportunities that are bundled into a single investment vehicle. They are managed funds that can hold a combination of any of the following asset classes (note this list is not exhaustive):

• Australian shares
• Global shares
• Credit and fixed income
• Cash
• Property
• Infrastructure
• Currencies

The manager of the fund actively manages the fund’s allocation based on the investment methodology and goal of the fund. Financial markets are a dynamic ecosystem and so are most multi-asset funds, which means the asset allocation changes over time at the discretion of the manager. The primary goal of the fund is to offer diversification and hedging mechanisms through exposure to a variety of asset classes as mentioned above.

Some funds are also built with a very specific objective in mind, such as delivering a return of 6% above the inflation rate.

Advantages of multi-asset funds

Multi-asset funds are a single investment vehicle which offer investors the opportunity to invest in a broad range of investment classes. These funds represent a convenient and relatively easy way to gain diversified exposure to financial markets and underlying trends.

Rather than you having to think about which securities or single-asset funds to buy or sell, how they should be weighted in your portfolio and managing the ongoing portfolio rebalancing, you can opt for a multi-asset fund and allow the manager to make all those important investment decisions.

Risk management is an important aspect and probably the most important advantage of this product. Multi-asset funds are typically suitable for conservative investors with a lower tolerance for risk, often retirees. They may also suit investors with a limited amount of funds at their disposal but are seeking a diversified, hands-off investing solution.

There are many funds which have achieved outstanding long-term returns, hence I believe every investor should at least consider the possibility of investing in a multi-asset fund. Many funds have achieved high single-digit or low double-digit percentage returns, which often includes a large income component.

Risks of multi-asset funds

As with any investment, the primary risk is the potential loss of capital as a result of unfavourable market movements. Even the most diversified investment is vulnerable to financial turmoil and returns are never guaranteed – always keep that in mind.

There is also no guarantee that a multi-asset fund will achieve its performance objective, so you need to think about which manager (or managers) you choose carefully if you decide to go down this route. Do your research and ensure you understand their investment process thoroughly.

Another risk is the so called ‘holding cost’. Simply put, the money that you invest in a multi-asset fund could potentially be invested elsewhere and generate better returns. Single-asset funds, individual stocks, a property or even your own business may perform better that the fund, hence an investment in a multi-asset fund may not be the most effective way to allocate your capital.

Next steps: finding the right fund

If you decide to invest in a multi-asset fund, your next step is to choose the ‘right’ fund. There is no shortcut and you simply must do your own research or speak to a financial adviser to help you find the right fund. In Australia, companies are required by law to provide a Financial Services Guide (‘FSG’) and Product Disclosure Statement (‘PDS’) if a financial services product is offered. These are important documents that you should read through to understand the fund’s goals, fee structure and investment process.

If you use an online broker that offers the ASX mFunds service, you will readily and easily be able to view and compare information such as the minimum investment, asset allocation, performance and fees between managers.

Based on the information provided, you have to decide if the fund’s objective is in line with your personal objectives, financial situation and risk tolerance.

Wise-owl’s take

Multi-asset funds are a convenient way to gain diversified exposure to a range of investment classes in one transaction. Many funds have delivered attractive long-term returns and while past performance is obviously no guarantee for future performance, their ability to quickly rebalance asset allocation based on market conditions and risks is a clear advantage at the current point in the investment cycle.

U.S. stocks have entered a mature stage in one of the longest bull-markets in history and the potential upside in stocks may be somewhat limited. Fees and portfolio allocation may range significantly between the funds, so make sure you do your homework before making an investment decision.

Here is a list of multi-asset funds available through ASX mFunds:

Source: nabtrade (performance data as at 30 September 2017)

nabtrade tip: To view, compare and access multi-asset mFunds on nabtrade, login and under ‘Insights Centre’ select ‘Managed Funds’. Then under the ‘ASX mFunds’ tab, look for ‘Asset Class’ and select ‘Allocation’ from the dropdown.

Click here for a 21 day free trial to Wise-owl.