What are multi-asset funds?
Multi-asset funds invest in a combination of asset classes, including equities, bonds and cash, and are often designed with different asset allocations to create a range of lower-to-higher risk offerings.
A multi-asset approach offers the potential to enhance returns and effectively manage risk by utilising the unique characteristics of each asset class. Different asset classes often respond differently to market conditions, creating opportunities to balance risk and reward.
Unlike investing in a single asset class, multi-asset investing provides a smoother return journey, tailored to an individual’s risk profile, through diversification and dynamic asset allocation.
The power of diversification
Diversification refers to the practice of spreading your investment portfolio across different asset classes, sectors, and global regions. This, which can be likened to the notion of not putting all of your eggs in one basket, is naturally a key strength of multi asset funds.
Diversifying across asset classes can lower overall risk without sacrificing return potential, resulting in a generally smoother investment journey. If the value of one asset falls, simultaneously another might rise, thus lowering the risk of overall loss.
For instance, equities offer the potential for long-term capital growth but are typically more volatile than fixed income securities, which typically provide a steady income but offer less scope for capital appreciation.
Bonds, particularly government and high-quality corporate bonds, offer relative stability and can act as a buffer during market downturns. Real estate, on the other hand, can serve as a hedge against inflation and provide both income and capital growth, but its illiquid nature can be a drawback at times.
Potential dynamic allocation benefits
Having a wide range of asset available means that the managers of multi-asset funds can actively adjust their allocations in response to changing market and economic conditions. This dynamic allocation allows them to tilt the portfolio toward asset classes that are expected to perform well under current or anticipated conditions, while reducing exposure to those facing headwinds.
By taking advantage of market opportunities and mitigating risks as they arise, dynamic allocation can help improve the likelihood of achieving positive returns over the long term. Importantly this can happen while also aligning the portfolio with an investor's risk and return objectives.
Targeting multiple goals
A key advantage of multi-asset funds is their flexibility to cater to a wide range of investor risk profiles. The funds are often designed to create balanced, well-diversified portfolios that can be calibrated to different levels of risk tolerance. Fund managers typically offer a spectrum of funds, ranging from more conservative, lower risk options that are more focused on preserving capital, to more growth-oriented options that take more risk with the aim of achieving higher long-term returns.
This variety allows investors to select funds that align with their individual financial goals, time horizons, and risk appetite. For example, younger investors with longer investment horizons may prefer higher-risk, growth-focused funds to take advantage of potential long-term market gains. On the other hand, those nearing retirement may prioritise lower-risk funds to preserve their wealth and provide more stable returns.
By offering funds tailored to varying risk tolerances, multi-asset strategies can support investors throughout different stages of their financial lifecycle, and adapting to their evolving needs and objectives.
"Multi-asset funds provide investors with easily accessible exposure to a diversified range of assets that can be tailored to meet individual investors’ particular goals and attitude to risk."
Ray Sharma-Ong, Senior Investment Director
Final thoughts
Multi-asset funds invest across a range of assets, with the aim of improving diversification, thereby lowering risk and facilitating a smoother investment journey compared to single asset investing.
The availability of multiple assets also means some scope for the managers of multi-asset funds to potentially boost returns by periodically altering allocations depending on market or economic conditions.
Finally, multi-asset funds are often part of specific fund ranges that allow for a good degree of tailoring to specific investor types and risk tolerances.