The first month of this year saw a raft of new 'multi-fund' launches from the likes of Prudential Scottish Widows. The providers have one eye on Isa season, as many of these products qualify to go inside the tax wrapper. But we'd be wary about piling in.
These funds are designed to provide automatic diversification. They invest in a number of different asset classes together. This might be done on a roughly even basis or a fund may feature a 'core' holding of, say, blue-chip equities with 'satellite' smaller holdings of commodities or emerging markets.
The overall idea is to reduce your exposure to any single risky sector or asset. That sounds attractive in the wake of the credit crunch when entire asset classes (ie, equities and hedge funds) took a beating together. But it also means you won't receive the full benefits if a particular asset class performs strongly. "A diversified portfolio should do less badly than a single asset class when a market falls," says Investors Chronicle's Lenora Walters. But "when markets rally, a multi-asset fund is likely to get left behind". Over the long-term that will affect your returns.
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The marketing blurb also tends to suggest these funds are good for cautious investors because the wide spread of assets helps reduce volatility. Yet as Adrian Shandley, managing director of Premier Management, notes, "they tend to reallocate when things are bad bolt the stable door after the horse has bolted".
Fund providers know you could invest in a range of assets yourself, but would argue that any portfolio needs to be readjusted to maintain its asset weightings. Multi-asset managers claim they can complete this rebalancing more quickly and efficiently than a private investor. But a glance at costs dashes this argument. Many have higher total expense ratios than single-asset funds, sometimes more than 2%.
Costs are especially high for multi-asset funds that invest in other funds ('funds of funds'), as this adds another layer of charges. The usual defence is that it adds even greater diversification via a range of managers. However, we don't see the point of paying fees to one manager who simply uses your money to pay other fund managers. In Isa season, ETFs and investment trusts are the better bet.
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