In a previous article, we stated that most advisers already ‘outsource’ at least some part of the investment decision-making process through use of single asset or multi-asset funds.
But what does an adviser actually need to consider when deciding to asset allocate through a multi-asset fund, or their using a portfolio risk management solution through a risk-targeted multi-asset product.
At outset, the objective of the multi-asset fund and its investment strategies needs to be clear: if an adviser outsources to a multi-asset fund he/she also needs to be confident that it does what it says on the tin. Attention should also be given to the cost structure, since charges are often higher with multi-asset funds because of the extra layer of fees.
Fund documents
The obvious starting places for checking a fund’s objective are the prospectus, annual report and fund factsheet.
The prospectus tends to be overlooked as it’s legalistic in its wording. However, with a bit of perseverance a vast treasure trove of information can be uncovered, for example precise areas of investment use and different strategies are typically listed.
Reports and accounts is another legal document and is useful for identifying costs, whereas fund factsheets tend to provide a quick snapshot of the funds – not normally enough for due diligence purposes.
The fund marketing document should give more detail on what the fund is about, but the adviser has to keep in mind when reading it that it is not a regulated document. Nevertheless, contained within the document will typically be information on the investment approach and detail on the investment process, including what asset classes, regions and sectors the fund invests.
Guideline limits on much can be allocated to each are also stated - however, these often give a lot more leeway than the manager really uses in practice - and there will normally be information on how investments are accessed, whether directly by securities or through funds, and in the latter case whether fettered or unfettered, active or passive, open-ended or investment trusts.
There is usually a statement of the investment objective in marketing documents, giving the adviser a clear idea of what the manager is trying to do with the fund.
Peer group comparison
It’s worth checking the fund’s positioning within the IMA peer groups. If a fund is in one of the Mixed Investments sectors, it’s likely that the fund manager will be focused on outperforming the peer group, although the time horizon for outperformance can vary considerably across managers.
Among the Mixed Investments peer group, positioning in any of the 0-35 per cent, 20-60 per cent and 40-85 per cent sectors will be a reliable guide to how much equities exposure a fund will have and will give therefore the advisor a clue on the risk exposure.
Scope for investing in other risk assets such as low quality credit funds, property, shorts and commodities, needs to be looked at.
