28 Feb 2018
The past few years has seen a huge increase in the popularity of multi-asset risk-managed funds. We look at how this compares to a traditional, mixed asset approach.
Funds that sit within the Investment Association (IA) Mixed Investment sectors have long been an integral part of most clients’ pension and investments. Yet a consequence of these funds existing in the same sector is the presence of a peer-group benchmark. Inevitably, this prompts managers to assess rival funds in an effort to outperform their peers.
This can encourage a herd-like mentality of increased risk in the attempt to achieve superior returns and a higher quartile ranking. What’s more, given the significant changes to the financial and regulatory landscape in recent years, we should ask if the Mixed Investment sector is still the most suitable solution for investors and retirement savers.
The below table shows the requirements that a fund must meet to sit in the various IA Mixed Investment sectors.
To understand if these criteria make sense to investors and retirement savers, here is an example comparison:
Theoretically, both funds in this example could sit within the “balanced” Mixed Investment 40-85% sector. In other words, a fund manager could create two very different portfolios: one which is high risk and the other which is much lower risk, but both funds could sit within the Mixed Investment 40-85% sector.
The practical implication is that the fund may align to a client’s attitude for risk at point-of-sale but this does not necessarily provide on-going suitability.
Another key factor for any portfolio is to observe how it performs during periods of market distress – a good example of this is the 2008 crisis. The dispersion of returns within the Mixed Investment 40-85% sector in 2008 can be seen in the diagram below.
The best performer generated nearly 10% in a very challenging year whilst the worst performer lost nearly 40%. In absolute terms, this is a near 50% dispersion between the best and worst performer. However, the more condemning statistic is that 10% of funds within this sector underperformed the FTSE All-share.
Theoretically the funds sitting within the Mixed Investment 40-85% sector, given their more diversified approach, should have been better positioned to limit losses during a period of market distress.
This highlights one of the dangers of following a peer-group benchmark and why in some cases contemporary alternatives are more appropriate.
Multi-asset and multi-manager solutions surfaced in the 2000s and have continued to grow in popularity since the Retail Distribution Review (RDR). In the wake of RDR, advisers are now tasked with meeting ongoing client suitability requirements, with risk profiling one of the most important components in deciding suitability.
The IA Volatility Managed sector was launched back in April 2017 and contains funds which target returns within specified risk parameters.
At launch, the sector had 83 funds with combined assets under management of £19.3 billion. Importantly, the IA Volatility Managed sector does not impose any investment constraints like the various IA Mixed Investment sectors, which gives the fund manager greater freedom to manage their portfolios more effectively.
KEY RISKS
The value of an investment and any income from it can go down as well as up and can fluctuate in response to changes in currency exchange rates. Investors may not get back the original amount invested.
These funds use derivatives; these can be complex and highly volatile. This means in unusual market conditions the funds may suffer significant losses.
These funds invest in emerging markets; these markets may be volatile and carry higher risk than developed markets.
Investors’ attention is drawn to the specific risk factors set out in each fund’s share class key investor information document (“KIID”) and Prospectus.
Important Information
For financial advisers only. This commentary is not an investment recommendation and should not be viewed as such. Except where stated as otherwise, the source of all information is Aviva Investors as at 31 December 2017. Unless stated otherwise any opinions expressed are those of Aviva Investors. They should not be viewed as indicating any guarantee of return from an investment managed by Aviva Investors nor as advice of any nature.
The Aviva Investors Multi-asset Fund range comprises the Aviva Investors Multi-asset Fund I (“MAF I”), the Aviva Investors Multi-asset Fund II (“MAF II”), the Aviva Investors Multi-asset Fund III (“MAF III”), the Aviva Investors Multi-asset Fund IV (“MAF IV”) and the Aviva Investors Multi-asset Fund V (“MAF V”) (together the “Funds”). The Funds are sub-funds of the Aviva Investors Portfolio Funds ICVC. For further information please read the latest Key Investor Information Document and Supplementary Information Document. Copies of these documents and the Prospectus are available to download in English from our document library.
All rights vest in the relevant London Stock Exchange Group plc and its group undertakings (collectively, the “LSE Group”) which owns the Index. “FTSE®” is a trade mark(s) of the relevant LSE Group company and is used by any other LSE Group company under license.
Issued by Aviva Investors UK Fund Services Limited. Registered in England No. 1973412. Authorised and regulated by the Financial Conduct Authority. Firm Reference No. 119310.Registered address: St Helen's, 1 Undershaft, London EC3P 3DQ. An Aviva company. www.avivainvestors.com