Equities versus bonds is an age-old conundrum but for those investors who are unwilling to make a commitment to either, there is a third option to offer the best of both worlds in the shape of a multi-asset fund which can hold both type of assets.
These funds will usually invest in a combination of assets such as equities, bonds, property and cash and will be rebalanced depending on the market environment. This reduces the risk from holding one type of asset but may simultaneously hinder potential returns.
You can also get balanced multi-asset funds, otherwise known as asset allocation funds, which will invest in a mixture of assets but hold the same proportion in each asset. The amount in each asset will usually be within a minimum and maximum limit depending on the fund’s goals. Unlike multi-asset funds, they do not usually rebalance or change their asset mix so may not be suitable for all market environments.
Simon Doyle, head of fixed income and multi-asset at Schroders, said: “Mixed asset funds provide investors with several benefits. The first of these is exposure to a wide mix of assets, this allows the investors to benefit from diversification to many different assets for a relatively small investment size. The theory is these assets often move in different directions so holding them together should result in a smoother, less volatile return for investors.
“The second potential benefit is professional management where experienced investors decide when to move in and out of each asset type. Markets move in cycles and sometimes over-exuberance can see one asset type become expensive while another type falls out of favour and becomes cheap. Timing markets like this is difficult and most individuals don’t have the time or expertise to do this themselves.”
Looking at the ACS sectors available for Australian investors, there are six sectors for multi-asset funds depending on the varying risk levels of the portfolios. These are mixed asset aggressive, balanced, cautious, flexible, growth and moderate.
The most popular of these is the mixed asset-growth sector which has 119 funds included and mixed asset-balanced which has 105 funds. Meanwhile, the ACS mixed asset-cautious sector has only 41.
By the nature of their diverse allocations, these type of funds are suited to a wider range of market environments than single asset funds and actively-managed funds will be able to rebalance their portfolios in order to suit the market activity.
“Some mixed asset funds have a relative static high exposure to single assets like shares which means that the market environment is almost as important to the mixed asset fund as it is to a single asset fund like a share fund,” said Doyle.
“On the other hand if the manager has been given lots of flexibility to move between assets then the market environment becomes less of an issue as the market timing decision has been passed from the investor to the manager.”
In a historic context, the best sector over 10 years is the mixed asset-aggressive sector which has returned 132 per cent, according to FE Analytics, although this is to be expected due to high-risk nature of the investments held in those sectors. Conversely, the lowest-risk mixed asset-cautious sector has returned 67 per cent over the same period.
Looking at more recent performance, the best-performing fund across the six sectors over the past 12 months to 31 July, 2019 was the Sandhurst Bendigo Socially Responsible Growth fund which has returned 13.1 per cent over the period and sits in the mixed asset-flexible sector.
This fund adopts a responsible environment, social, and governance (ESG) investment process and is diversified with allocations to multiple asset classes including Australian equities, property and fixed interest. It has a medium to high risk level and a recommended five-year time horizon.
The worst one was the QIC Liquid Alternatives fund, which also sits in the mixed asset-flexible sector, which lost 7.9 per cent over the same period, according to FE Analytics. It aims to offer equity-like returns but with less risk by down-weighting broad equity market risk and generating returns from alternative risk factors.
However, pleasingly, there were only four funds out of more than 450 funds across the various Mixed Asset sectors that saw negative returns over the past year.
When the returns of the various six sectors were averaged out, the average mixed asset fund returned 6.2 per cent over one year to 31 July, 2019.
Doyle said: “The return of a mixed asset fund will always be a mix of its single asset components. What multi-asset funds provide are better risk-adjusted returns than single asset funds as a result of the diversification to assets which perform differently to each other. In other words, investors should be able to grow their savings with less volatility than would be the case with investing in a single asset fund.”