Multi-asset index funds are a powerful and straightforward way for DIY investors to create a multi-asset, diversified and low-cost core holding within a portfolio.
How much should I have in my core?
For index investors not wanting to worry about creating and managing their own asset allocation, these funds can provide a one-stop shop and receive a 100% allocation.
For investors who enjoy picking their own stocks or funds, these funds can provide a helpful core exposure. The extent to which multi-asset funds make up a core is up to the investor as a preference, and obviously impacts the similarity of portfolio performance to a multi-asset fund.
Investors who want the bulk of their risk-return characteristics to be self-selected should consider a lower allocation to a multi-asset fund core, for example 20-40%.
Investors who want the bulk of their risk-return characteristics to be consistent with the chosen multi-asset fund should consider a higher allocation to that core, for example 60-80%. Self-selected single asset class investments would thereby represent satellite holdings.
Selecting a risk profile
Multi-asset funds typically come in “suites” with 3 to 5 versions to choose from based on risk profile. Risk profile can be defined by percentage allocation to equities, so investors can select a risk-return profile that is consistent with their objectives.
How do they differ?
Multi-asset index funds will differ in the following ways in terms of philosophy and process:
Does it make sense to hold more than one multi-asset fund?
Not really. Multi-asset funds of the same given risk profile (as defined by % equity allocation) will have similar risk-return characteristics. The building block index funds they use will mean similar underlying equity/bond exposures. They are all incredibly well diversified. Having multiple multi-asset index funds just reduces economies of scale, introduces higher frictional dealing costs, and blurs transparency around asset allocation. Investors should therefore select a multi-asset fund whose objectives and investment process resonates best and where value for money is keenest.
Comparing multi-asset funds
The IA Mixed Investment Sectors are peer groups of multi-asset funds.
There are four relevant “risk profiled” sectors for multi-asset funds (Target Volatility and Target Absolute Return funds are treated separately.)
However these remain popular peer groups for comparative purposes.
A 60/40 index can help comparison
As the bulk of assets flow into “balanced” multi-asset funds with a 60% equity allocation, we created a 60/40 equity/bond index for GBP investors to provide a comparator for multi-asset funds. This means that investors can evaluate multi-asset fund managers skill at 1) creating optimised portfolios over a “boring” 60/40 portfolios; and 2) evaluate the value added by dynamic asset allocation decisions relative to a static-weight index. While additional indices for different risk profiles may make sense in the future, we believe a 60/40 index is an important first step.
ETF Investment Strategy