As multi asset investing has grown in popularity over the past decade it has made the craft of assessing the suitability of funds in a portfolio more complex.
The performance of the Investment Association’s four multi-asset sectors in 2017 shows that the average IA Flexible Investment fund came out on top with an 11.19 per cent return, according to FE Trustnet data.
The reasons behind the growth are driven by the opportunities a multi asset strategy gives to invest across an entire universe of asset classes globally, including equities, fixed income, commodities, and cash.
Andrew Harman, portfolio manager at First State Diversified Growth Fund says: “[It] can provide a high degree of diversification and a better risk-adjusted return than a single asset class option, such as fixed income or equities in isolation.
"Additionally, a multi-asset approach offers real-time risk insight and the ability to adjust portfolio positions for prevailing market conditions.”
Amid this growth advisers and private investors have outsourced their investment decisions more and more to fund managers with a remit to allocate across asset classes.
The role of advice
So what role do advisers play in assessing the suitability of a portfolio?
Suitability typically looks at how appropriate the funds are in relation to how they match the client’s needs, objectives and attitude to risk.
According to Scott Gallacher, director at Rowley Turton, his method involves looking at how the fund is invested in terms of asset allocation, volatility and then tries to match that to the client’s needs.
“[If you don't do it right] you might end up with a portfolio that is medium or lower risk even though it might contain high risk funds because not all funds are 100 per cent correlated," he adds.
“We also look at correlation of data, because if they are all doings things in the same way we might find the portfolio is not improving in terms of risk or return.”
To help in assessing the suitability of the portfolio Mr Gallacher uses a software tool which he said gives him more in-depth information at the click of a button.
Without the software, he says the job would be more difficult, because it would involve pulling out the data and a lot more manual and independent study.
At wealth management firm Lockhart Capital management, chief investment officer Andrew Wilson says when considering suitability, he takes into equal consideration the volatility and valuation of the funds.
He also believes that having an in-house investment planning team gives the firm an advantage because the advisers have complete oversight of what his team is doing and the client is also much closer to the asset.
