Most DFMs certainly have the capabilities to invest in most asset types and due diligence should include requests of evidence.
For instance, if a discretionary manager claims to have derivative investments as a tool in their armoury there may be an expectation of certain derivative overlays to be employed in order to reduce risk. However, if there is little evidence of them ever doing so the claim does not mean a lot.
Multi-asset funds
The multi-asset fund option offers a fund route as compared to the DFM approach with MPS (or even bespoke). The multi-asset fund universe consists of two key management styles, either multi-manager (fund of funds approach) or single manager (directly invested approach).
There will of course be some clients who are content with an unrestrained mandate and are sufficiently knowledgeable to entrust their assets to single manager and sector funds, perhaps relying in part on an advisory service. It is these very clients who may be suitable for the multi-asset fund option.
The possible levels of diversification include:
• Holdings: geography or asset type (equity, fixed interest, property, etc.)
• Assets: traditional versus alternatives, the latter bringing into play other security types and investment methodologies such as commodities, currencies and hedge fund techniques
• Investment vehicle: direct stock market securities, unit trust/Oeics, investment trusts, exchange-traded products
Athough there are really only two approaches to investment, there are several ways of getting there.
This means that there are subsets of the multi-manager approach and therefore considerations for the adviser and an opportunity for the adviser to add real value. These subsets include exactly the same decision making process as for the DFM solutions:
• Investment style: either risk targeted or return focused approach
• Asset type: traditional or traditional and alternative
• Investment method: passive and active (and blend)
• Management type: multi-manager or single manager (directly invested)
These aspects are not mutually exclusive and so this visual taxonomy illustrates in some detail how the multi-asset fund world breaks down. Advisers’ and clients’ preferences across these different aspects will be fundamental to determining the appropriate fund type.
The four core building blocks which we believe contribute to the construction of multi-asset funds are absolutely fundamental to selecting solutions in this market and really need to be fully understood to appreciate the nuances and variations between individual funds and fund families available.
Finally, it is worth noting here that the pure passive fund route and the use of single sector funds falls firmly under the ‘DIY’ subset rather than investment outsourcing. Of course multi-asset passive funds still qualify as fully outsourced solutions given that both the asset allocation and fund selection are made by a third-party manager.
