In the real world, where making the perfect decision every time is impossible, investing is about finding the right balance of risks and opportunities. Sometimes, on a short-term basis, this includes avoiding downside as much as benefitting from upside.
In performance terms, a well-diversified portfolio should have something to offer whatever the economic weather. Multi-asset funds seek an optimal balance between risk and return by investing across different asset types. By diversifying across different asset classes, in different sectors, and across different geographies, clients have more sources of potential return, which will behave differently according to the prevailing market conditions. This helps to manage portfolio risk. Creating stability in this way puts advisers in a better position to withstand dips in performance and remain confident in the financial journey as they work towards reaching their customers’ financial goals.
We believe the consistency and stability of a fund’s risk profile is important to investors and decision-making advisers. We have therefore evolved the investment approach of the funds now in the DRM range.
Central to the changes is a move to volatility targeting, whereby the funds are managed to stay within specific expected volatility parameters and therefore a static risk profile, while aiming to maximise returns. The different funds within the range match different investors’ appetite for risk.
We’ve added an additional fund to the range, the Diversified Risk Managed V/5 Fund, to ensure that the range spans all risk profiles from 3-6, as defined by the third-party risk profilers, Defaqto. We removed currency and geographic restrictions in place in the risk profile 3 strategy, allowing it to invest globally across equities and fixed income. Exposure to UK and global property and infrastructure opportunities widens the choice of investments and provides greater diversification. The Multi-Asset team ensures that the funds stay aligned to the targeted risk bands.
With the previous version of the funds, limits on equity holdings naturally constrained volatility. However, without targeting a specific volatility range, funds are susceptible to excessive movements up and down the risk scale depending on the proportion of risk assets held, and the changing volatility of risk assets in the fund.
Within the new version of the range, correlation, volatility and returns are continually assessed through portfolio management, and rebalanced where necessary, to ensure they stay within the volatility bandings of each fund. Portfolio positioning is reviewed daily.
When selecting the funds that make up each portfolio, we take a pragmatic approach based on the strategic asset allocation (SAA) and current tactical asset allocation (TAA) view. Where suitable, we’ll use active in-house funds, lowering overall costs. In addition, we use passive funds to implement top-down sector, factor and style themes, with these offering comparatively low cost and efficient implementation of our investment ideas. We use active third-party funds for specialist allocations.
To align each fund to a volatility band, the expected volatility of the asset allocation of each is regularly checked by an independent specialist.
In order to thoroughly test our investment ideas, highlighting convictions and views, the Multi-Asset team meets quarterly with CLAM’s specialist asset class fund managers. This is followed by a meeting of the asset class heads to review and if appropriate adjust the SAA – including regional equity allocations, credit, duration and FX risk – based on the starting SAA, asset mix meeting, multi-asset team views and liquidity considerations. Final asset allocation is reviewed quarterly by the independent SAA provider.
In addition to those afforded by the SAA, we seek out opportunities for the funds to benefit from shorter-term market trends. These tactical opportunities are implemented through shorter-term asset allocation when markets are volatile. In making these decisions, we combine our assessments of the global macroeconomic picture, valuations across asset classes and – drawing on research from the trading desk – a technical assessment of the potential pricing anomalies and momentum in asset prices.
Multi-asset funds in general can be suitable for all types of clients – whether they’re accumulating wealth or are in the process of drawing down in retirement. They’re ideal for clients who want to be sure their investments are managed closely in line with the risks they’re willing to take, but don’t want to pay the higher charges associated with a single investment solution.
The DRM range could be a good fit for advisers looking for predefined multi-asset solutions aimed at a target market of clients who are looking for long-term growth within their assigned risk profile. By taking both a longer-term view within the scope of the customer’s risk profile, and with a tactical view on shorter and medium-term markets to maximise returns, the DRM range can offer a straightforward way of meeting their needs now and into the future.