Multi-asset funds

®

www.citywire.co.uk/adviser

October 2009

In association with

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�Multi-asset funds �

Multi-asset fundsThe new breed of multi-asset funds can help advisers build protection and performance into client portfolios but it needs skilled managers to strike the right balanceThe turmoil seen in the financial markets over the past two years has only served to underline the importance of building diversification into a portfolio.

Uncertainty has ruled supreme with the world seemingly lurching from one extreme outlook to another with fears of financial Armageddon morphing into stagflation and now recovery.

Each of these scenarios favours different asset mixes and the ability to switch between the different asset classes has been crucial to both ensure participation in the upside and limiting the downside.

This has been highlighted by the massive see-sawing of returns witnessed across

different assets. The stock market has lurched from a disastrous 30% loss last year to 40% plus gains this year, while gilts, the heroes of 2008, have produced negative returns year to date.

Such has been the speed of the changes in sentiment, it has been nigh on impossible for investors and advisers to be able to react quickly enough to fully protect their portfolios.

The rise of multi-asset funds Against this backdrop it is little wonder that multi-asset funds have really come to the fore. Traditionally, savers have invested in equities for long-term growth and bonds

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Cazenove Multi-Manager Diversity FTSE All Share

-14

-12

-10

-8

-6

-4

-2

0

2

Feb-09Jan-09Oct-08Sep-08Jul-08Jun-08Jan-08Nov-07Jul-07May-06

The worst 10 months of the FTSE All Share since Cazenove fund was restyled in 2005

Source: Cazenove Capital

� Multi-asset funds

Sound performance from unlimited investment channels.

Cazenove Multi-Manager Diversity Fund 1% AMC†

www.cazenovecapital.com/diversity

† Inclusive of 0.5% renewal commission. Past performance should not be seen as an indication of future performance. The value of investments and the income from them can go down as well as up and investors may not get back the amount originally invested. Details of the terms and risk warnings are contained in the Simplifi ed Prospectus. Issued by Cazenove Capital, the name under which Cazenove Capital

Management Limited (registered no. 3017060) and Cazenove Investment Fund Management Limited (registered no. 2134680), each authorised and regulated by the Financial Services Authority and of 12 Moorgate London EC2R 6DA, provide investment products and services. Prepared for professional advisers for information purposes only and must not be distributed to retail investors.

I09011_NMA_MM_Div_Ad.indd 1 16/9/09 11:10:30

1for some protection against market falls and to provide a degree of income. Other funds would also throw property into the mix with cautious managed or life funds typically carrying an asset mix of 60% equities, 30% bonds and 10% property.

Although on the face of it, this offers an attractive spread of risk, the fact that all three asset classes suffered heavy losses last year really shows that true multi-asset investing requires more than this.

Over the last few years a new breed of multi-asset funds have come to market that can invest across a much broader spread of asset classes, including commodities, private equity, hedge funds and other alternatives.

Several asset managers have launched multi-asset funds in recent years,

including Cazenove Capital, Fidelity, Scottish Widows Investment Partnership, Aberdeen and Barings.

Harvard and Yale see the potentialThe idea is hardly a new one and top US universities Harvard and Yale were the trailblazers in pursuing alternative investment strategies when they began backing venture capital in the 1970s.

The asset class was considered highly exotic back then and by the time other company and public pension funds started to follow suit in the 1980s and 1990s the Ivy Leaguers had already secured investments in many of the leading funds which were by then closed to the latecomers.

Yale continued to lead the way in 1990

LEAdIng EdgE: Harvard and Yale have benefited hugely from alternative investment strategies

5Multi-asset funds 5

Sound performance from unlimited investment channels.

Cazenove Multi-Manager Diversity Fund 1% AMC†

www.cazenovecapital.com/diversity

† Inclusive of 0.5% renewal commission. Past performance should not be seen as an indication of future performance. The value of investments and the income from them can go down as well as up and investors may not get back the amount originally invested. Details of the terms and risk warnings are contained in the Simplifi ed Prospectus. Issued by Cazenove Capital, the name under which Cazenove Capital

Management Limited (registered no. 3017060) and Cazenove Investment Fund Management Limited (registered no. 2134680), each authorised and regulated by the Financial Services Authority and of 12 Moorgate London EC2R 6DA, provide investment products and services. Prepared for professional advisers for information purposes only and must not be distributed to retail investors.

I09011_NMA_MM_Div_Ad.indd 1 16/9/09 11:10:30

when it became the first institutional investor to recognise hedge funds as an individual asset class.

The results have been staggering with the average Ivy League university endowment up 488% between 1991-2005, compared to an average university endowment return of 268%, according to Harvard Business School.

Retail investors have had a long wait to be able to access these strategies and it was only with the introduction of the UCITS III rules that asset managers were able to offer them to the wider market.

As with all new products, investors do need to understand what they are buying. The different groups take different approaches with some investing directly and others favouring a best of breed multi-manager approach.

grasping the strategyHowever, the underlying concept is basically the same. By spreading risk over a number of different asset classes with different characteristics in the right proportions at the right time within a portfolio, investors can achieve better risk-adjusted returns over the long-term than by simply investing in a single asset class.

Managers need to be flexible, however, and bear in mind that correlations are a

We have been a big supporter of the Cazenove fund and see it as a core holdingMike HorsemanCockburn Lucas IFA

� Multi-asset funds

movable feast and diversification for its own sake can be ineffective. This has been seen over the past two years with commercial property and private equity in particular.

It also goes to show that multi-asset funds are not a panacea. They are not guaranteed funds and although they would be expected to beat cash over say a rolling three-year period, there will be exceptional circumstances where positive returns will be almost impossible to deliver. The fallout from the collapse of Lehman Brothers last September is a case in point. Virtually every asset class fell in tandem in the panic, but the effects on certain portfolios were mitigated where the fund managers had the flexibility to hold hedge funds or structured products offering downside protection against falling equity markets.

Flexibility is keyThis is one of the reasons why Mike Horseman, managing director of Cockburn Lucas IFA, is a supporter of the Cazenove Multi-Manager Diversity fund.

The fund, managed by the experienced team of Marcus Brookes and Robin McDonald, holds a fairly constant spread of a third in cash and fixed income, a third in equities and the final third in alternatives. But within those silos the managers have massive flexibility to switch between different asset types to position the portfolio either defensively or for a period of economic expansion.

Horseman says: ‘We use multi-asset funds and have been a big supporter of the fund and see it as a core holding, particularly for clients with a more moderate sized portfolio that is not sufficient for a segregated mandate

to be economically viable.’

Building client portfoliosIf one thing has held back the take-up of multi-asset funds it is arguably advisers being confused about how exactly to fit in the portfolios within their clients’ overall asset allocation. If they have a go-anywhere mandate this can cause issues. However, Horseman’s assertion that they can form a solid core for a portfolio is a sound one and he adds that advisers can then build a satellite portfolio with more racy funds around that.

‘They are never going to shoot the lights out but over the course of a market cycle they will deliver solid performance around which you can build a satellite portfolio. They will not be sexy during a bull market but the drawdown on the best funds has been a third or less of the average cautious managed fund during the downturn,’ he adds.

Whereas he backs the Cazenove Multi-Manager Diversity as a solid core holding for cautious or balanced investors, he says the product can equally be suited to more aggressive clients.

The key is to find groups that have the expertise and experience of investing across a broad range of asset classes and managers with whom advisers can have confidence in their asset allocation calls. Multi-asset funds are undoubtedly another effective addition to the advisers’ toolkit but the old investment cliché of looking under the bonnet certainly rings true.

The importance of being able to diversify a fund’s asset mix is undeniable but being able to do this right is a whole different ball game.

For more information or to request a callback, please fill out the details below and send freepost to Cazenove Capital:

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