These are volatile times for investors, so it is important to pick funds that are responsive to change but keep costs low.
Our MyMap range of multi-asset funds are designed to do just this.
They’re constructed from well-priced, risk-rated funds but with an active management team at the helm, rebalancing quarterly, or more often if necessary, given market conditions.
The marvels of multi-asset
Multi-asset funds are, in general, a popular option for investors, with figures from the Investment Association showing steady growth in the proportion of UK investors’ funds that are now invested in these products, from 12 per cent to 17 per cent between 2005 and 2020.1
The appeal is their simplicity.
These ready-made funds make it easy to build portfolios that match clients’ goals and risk profiles.
Not all multi-asset products are created equally. Before choosing a favoured suite of products, you need to understand how the funds are run and managed.
A tale of three fund types
On the one hand, you have static-weighted multi-asset funds, where the ratio of stocks to bonds is meant to determine the supposed level of risk.
However, although these static-asset allocation portfolios may have produced returns commensurate with their risk ratings in the past, they have struggled to adapt to recent elevated volatility across equities and fixed income.
On the other hand, you have multi-asset funds with a greater level of active management, where fees may be higher, but expert managers can respond to changing market environments.
In the middle are funds like our MyMap range, with a hybrid approach which tries to keep fees low with cost-effective funds and expertise levels high.
Changing correlations
One of the biggest investment changes in the recent bewildering months has been the seeming evaporation of the negative correlation between equities and bonds.
This old faithful, which holds that one asset goes up when the other goes down, has informed portfolio construction for many years.
It allowed the construction of risk-rated funds with a static-weighted structure, where the ratio of stocks to bonds determined the level of risk.
However, the current market environment has broken the link.
When equities have fallen, bonds have struggled, too.
The UK corporate bond market, as shown in the S&P UK Investment Grade Corporate Bond Index,2 is down 20 per cent over the year, while the FTSE 250 is down around 22 per cent over the same one year period3 with the FTSE 100 down over 2 per cent.4
Because of this, the static-weighted approach of these funds has been questioned.
The need for speed
Agility has been essential to react to changing times. The MyMap managers, when rebalancing their funds, can adjust asset allocations if the funds’ risk levels are kept within their acceptable ranges.
Recently, they have scaled back equity investment and taken positions in other assets to preserve capital. This ability to adjust investment types to deal with changing global markets has helped preserve capital.
Typically, these funds rebalance quarterly, but changes can be made at any time if managers feel that speed is of the essence.
“The recent demise of negative correlation between stocks and bonds has been a huge challenge for multi-asset investors. Our investment process is designed to help weather exactly this kind of storm,” says MyMap co-fund manager Chris Ellis Thomas.
Keeping a lid on it
High fees eat into client returns, so MyMap keeps costs low, using cost-effective exchange-traded funds and index funds to construct risk-rated portfolios.
The funds charge just 0.17bps (except MyMap 4 Income fund which charges 0.28 bps), less than many static funds.
A time for preservation
There’s no denying that investors will be dealing with volatility for some time.
The role of a good multi-asset fund manager in this situation is to protect and grow capital. Ensuring that the funds they choose have the mandate and tools to do this should now be at the front of every adviser’s mind.
And when the market returns to growth, these same funds will be well placed to deploy capital to take advantage.
Changing times won’t be helped by static weightings. It’s time to take a more active approach.
Sources:
1 The Investment Association Annual Survey (page 83), The Investment Association, September 2021
2 S&P UK Investment Grade Corporate Bond Index. Source S&P Global, 3 Nov 2021 to 3 Nov 2022
3 FTSE 250 (INDEXFTSE: MCX), London Stock Exchange, 3 Nov 2021 to 3 Nov 2022
4 FTSE 100 (INDEXFTSE: UK), London Stock Exchange, 3 Nov 2021 to 3 Nov 2022
