The IA Mixed Investment sectors

Patrick Norwood, Insight Analyst (Funds)

Multi-asset and multi-manager funds invest across several different asset classes rather in a single asset class. In the case of a multi-asset fund, one fund management firm invests directly across these different asset classes; whereas with a multi-manager fund the fund manager selects a different fund or manager for each different asset class. The rationale for multi-manager investing is that no one firm can be the best across every single asset class and instead one should seek out a specialist manager for each different area. The disadvantage of this approach is that by employing external managers an extra layer of fees will be introduced, making multi-managers more expensive than multi-asset funds on average.

A big advantage of both multi-asset and multi-manager is that the security/fund selection and asset allocation is outsourced to the fund management firm, who should be experts in these areas, rather than the investor or adviser having to decide on an asset allocation and then select individual securities or single-asset funds themselves. Both of these approaches became popular and grew strongly in the 2000s and early part of this decade (see more below).

In the UK, multi-asset and multi-manager funds are grouped into the following four ‘Mixed Asset’ sectors by the Investment Association (IA):

• Mixed Investment 0-35% Shares - where funds are required to hold at least 45% in investment grade bonds and/or cash and a maximum of 35% in equities
• Mixed Investment 20-60% Shares - where funds must hold a minimum of 30% in bonds and/or cash and between 20% and 60% in equities
• Mixed Investment 40-85% Shares - where there is no minimum bond or cash requirement but between 40% and 85% must be held in equities
• Flexible Investment - where there is no minimum equity, bond or cash requirement and up to 100% can be held in equities

The expected risk and return profile for each sector will obviously increase with the amount of equities permitted.

In terms of the IA’s numbers for annual net retail sales, the Mixed Investment 20-60% Shares sector was the best-selling IA sector in five of the eight years from 2006 to 2013. Over the last couple of years, however, UK Equity Income and Targeted Absolute Return have generally been the best-selling sectors on a quarterly and monthly basis. This is most likely due to the announcement and enactment of the government’s ‘Pension Freedom’ reforms.

Source: The Investment Association

As at February, the latest available month, total assets under management (AUM) of the Mixed Asset sectors was £105bn. This is 11% of the total AUM across all IA sectors. As can be seen from the chart, the majority of Mixed Asset AUM is in the ‘20-60%’ and ‘40-85%’ sectors.

In conclusion, after several years of strong growth, UK investor attention appears to have turned from the multi-asset to the income and absolute return sectors. A big reason for this is the government’s pension reforms. Another possible reason is that advisers and investors are now less willing to pay the higher fees associated with multi-manager investing as they have become more focused on costs. However, the increased focus on income and absolute return is actually not such bad news as many of these funds will be multi-asset in nature anyway!