Multi-asset income funds

Elements of this article first appeared in New Model Adviser on 6^th November 2017

Patrick Norwood - Insight Analyst (Funds and DFM)

Introduction

Multi-asset funds, as their name suggests, contain investments across several different asset classes - equities, bonds, cash, real estate and possibly other ‘alternative’ asset classes - with the fund manager deciding on the proportion going into each. In the case of multi-asset income funds, the emphasis will be on those asset classes producing a ‘natural’ income, in particular bonds, including high yield and emerging market debt, real estate and equities paying decent dividends.

Why use multi-asset as opposed to single-asset funds?

The benefits of multi-asset funds include: access to a greater number of asset classes and investment styles than if an investor were to build their own portfolio; and a professional fund manager or investment team rather than the adviser carrying out the asset allocation between the different asset classes and sub-classes.

What are the pros and cons (v DFM MPS)?

In relation to discretionary portfolios, the main advantages of funds are lower charges and lower minimum investments on average while the main disadvantage is no individual service or reporting.

The market for multi-asset income funds

Following the Pension Freedom reforms announced by the government in 2014 and introduced a year later, the demand for income funds increased significantly and the fund industry has responded to this. We estimate multi-asset income assets under management (AUM) in the UK to be around £80bn, spread across 167 funds and 440 share classes at our last count (this compares to total multi-asset AUM in the UK of approximately £250bn).

How are advisers tending to use multi-asset income funds?

As alluded to above, many advisers will recommend income funds to clients in retirement, instead of or in addition to purchasing an annuity. However, we also see them used in the accumulation phase.

How should advisers go about selecting multi-asset income funds?

From a quality point of view, many of the criteria for selecting multi-asset income funds will apply to fund selection generally:

• Business strength of the fund management firm
• Quality and stability of the manager or team behind the fund
• Underlying investment philosophy and process
• Risk-adjusted performance over a meaningful time-period
• Charges
• Accessibility via the adviser’s or investor’s chosen platform

Criteria more specific to income funds include yield and ‘capital batting average’. The latter is a measure of the proportion of time that the fund’s value has been equal to or above its initial value over the measurement-period.

Following the Retail Distribution Review a few years ago, financial advisers now generally focus on suitability for their clients in the first instance. As part of this they will undergo a lengthy process of discovery with the client, looking at their goals and determining their attitude to risk and capacity to accept losses. Defaqto Engage software solution is an investment planning tool that has over 17,000 funds and a vast amount of data and workflows to service a range of clients, whether they be looking to grow their wealth, consolidate assets or withdraw an income.

Engage helps advisers manage their financial planning process all in one place, allowing advisers to efficiently meet their differing clients’ needs and their firm’s preferred financial planning process as well as providing all the necessary documentation to ensure that they are delivering suitable, compliant advice.

Alongside this, Defaqto have risk rated many multi-asset income funds for both accumulation and decumulation, using mainly volatility metrics but also some other more qualitative measures. The adviser can then match funds with a Defaqto risk rating corresponding to the client’s risk profile.

Defaqto cover the whole of the UK multi-asset income market to the best of our knowledge when carrying out our quality (Diamond) ratings of funds, plus an increasing number of multi-asset income funds in our risk/suitability ratings, for both accumulation and decumulation. Through this we have seen some variation in returns, smoothness of income levels and cost across these funds. Our Diamond and risk ratings can help advisers and their clients see how income funds have fared on these (and other) features plus which funds have delivered and which have not.