Last time, I talked about using ‘multi-asset’ funds (which invest your money across a range of different assets, from bonds to equities to commodites) as a simple, one-size-fits-all way to invest in a diversified portfolio for the long term.
I also mentioned that you should cut your costs by going with managers who use passive funds. Given these over-arching preferences, how do you pick the right fund for you?
The three main options
Cutting through the jargon used by fund managers, there are three main options to consider when choosing a multi-asset fund, and the choice will be mainly influenced by your time horizon – how long are you able to invest?
If you are a very long-term investor, willing to sit tight for the next 20 to 30 years, I’d recommend finding an aggressive, equity-oriented portfolio (probably called something like ‘growth’ or ‘adventurous’) that charges a low fee and does very little in the way of switching around assets.
If, like many investors, you don’t have that long – if your horizon stretches to perhaps ten years at most – then you’ll be more concerned about the threat of substantial capital loss. That takes us to the second option.
You may want to try to reduce this risk by using a manager who will look out for pending market changes – someone who is more ‘dynamic’ in how they juggle the assets around, to maximise returns. But this ‘dynamic management’ of the risk/return trade-off comes at a cost.
The first is in extra fees for all that tactical market thinking. But more importantly, all that buying and selling involves trading costs, which in turn makes it all the more costly if your manager makes the wrong decisions about what to buy and sell.
However – and this is the third option – some investors might be willing for a manager to take a very active approach, particularly if they are focusing on ‘absolute returns’ – ie, they want to keep the risk of capital losses to the absolute minimum and ideally even make money in falling markets.
Such managers may still use passive funds to build their portfolios, but trade in and out of them aggressively, depending on market conditions.
Good bets for the long term
If you sit firmly in the long-term-investor category, I would pick a low-cost, multi-asset-class provider who takes a strategic approach (ie, a long-term view) to mixing and matching assets, such as Vanguard with its LifeStrategy funds.
These charge just 0.29%, plus initial charges for the mixture of assets. These start with 20% equity exposure and go all the way up to 100%. The 100% equity exposure makes most sense for me.
Do be aware that Vanguard won’t change its allocations much over the long run – but nor should it, because too much tinkering with asset choices tends to detract from returns.
If you are uncomfortable with using just one manager, who in turn only uses their own funds, you could instead consider the excellent series of funds from Total Clarity Funds (TCF), which are run by an independent manager.
You’ll pay a bit more than for the Vanguard products, but you may feel more secure knowing you’ve diversified your underlying providers (although I must say I wouldn’t be worried about relying on Vanguard).
One last point for those with a long-term view – I would only go for an equity-oriented multi-asset fund (say the 80% and 100% Vanguard alternatives, or an ‘adventurous’ tag for other providers), because I think that bonds-based funds face very specific nearer-term risks. Bonds look hideously expensive and there’s a good chance that they could produce negative real returns (after inflation) for a decade or so.
A balanced approach
For the more balanced investor looking to dial down their risk levels through more active management of different asset-class choices, I’d recommend a broader range of managers, starting with HSBC and its World Index range.
It is still fairly strategic in its risk management, but does include some dynamic (in other words, more short-term) positioning based on the bank’s asset-allocation process.
You could also look at a clutch of specialist companies that build passive portfolios using a more dynamic risk-management approach – although the degree to which they trade in and out of assets varies hugely.
The biggest player is probably 7IM and its Asset Allocated Passive (AAP) portfolios. The company has gathered a large amount of money in recent years, largely by taking a fairly tactical view about which assets to pick, based on the risk level of the fund. 7IM is also fairly experimental.
It uses different types of passive fund structures to achieve its desired objective of diversified, low-cost multi-asset-class access to the markets. It uses everything from exchange-traded funds (ETFs) and commodity ETFs (known as ETCs) through to futures and options contracts.
However, Evercore Pan Asset, now owned by Charles Stanley (with John Redwood as manager), is fast emerging as a big rival to 7IM. My guess is that Charles Stanley Direct will aggressively push this suite of low-cost funds as a mainstream alternative to more traditional discretionary managed portfolios that use active funds.
Where to find ‘absolute returns’
The likes of 7IM and Evercore will take a more tactical approach to investing, but they won’t be anywhere near as active as an investment house that focuses on absolute returns.
These very actively-minded investors will use all manner of signals and cross-asset-class research to pick the right asset classes to invest in as markets swing between extremes of fear and greed.
Many of the most successful absolute-returns managers, such as Standard Life, already make extensive use of passive funds and futures, but they’ll almost certainly also use actively-managed funds as well as some direct stockpicking.
If your end game is absolute returns, there’s probably nothing wrong with this liberal approach to ‘fund types’. However, I have to say that I’m not entirely convinced, largely for two reasons.
The first is that costs are likely to rise sharply, with many absolute-returns funds pushing past charges of 1.5% a year. The second is that, as complexity increases, so too do the chances of the manager making bad bets. So overall I’m not a fan of the approach.
But if it appeals to you, then in the world of passive multi-asset funds, I’d favour the absolute returns-focused approach used by Alan Miller’s SCM, which can be accessed either via a unit trust, or via a Deutsche ETF called SCM Multi Asset ETF (LSE: XS7M).
How to make your choice
So what should you buy? Consider your age and your tolerance for risk. If you are young, with many years before retirement (or you are just very tolerant of risk), I’d go for the 80%/100% equity versions of Vanguard’s LifeStrategy range or TCF’s Total Clarity Diversified Long-Term Growth fund.
For the middle-of-the road investor, I’d opt for HSBC’s World Index Balanced portfolio, or 7IM’s AAP Balanced fund. For very careful, risk-averse investors, I’d stick either to a simple cash and bonds portfolio (easily built DIY-fashion), or go for SCM’s funds, 7IM’s AAP Moderately Cautious portfolio or Evercore’s PanDefensive fund.