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The rise of passive multi-asset funds

Multi-asset funds that are as passive as possible, and often use index trackers, have garnered a great following. But some advisers still see benefits in an active approach

The rise of passive multi-asset funds

Multi-asset funds are on track to outsell both equity and bond funds this year, and a deeper analysis of inflows within the sector shows that passive portfolios are the most popular.

Almost £7 billion flowed into multi-asset investments in the first seven months of 2017, outstripping the £5.2 billion that went into equity funds and the £5 billion that went into bond funds, according to figures from the Investment Association (IA).

Vanguard’s LifeStrategy range dominates flows into the IA’s Mixed Investment sectors, data from Morningstar shows. The four LifeStrategy funds that sit in the 0-35%, 20-60% and 40-85% Mixed Investment sectors took in £2.1 billion in the year to 22 September – a third of the £6.3 billion that flowed into the 30 most popular funds (see tables below: click on them to enlarge).



Randal Goldsmith, a senior analyst at Morningstar, said: ‘Vanguard comes out on top in terms of where the flows are going, which gives a good indication of what advisers are interested in.’

He believes the range comes as close as possible to a pure passive multi-asset solution. ‘It’s quite difficult to be purely passive in this sector because there isn’t a multi-asset index that funds can track,’ he said.

‘The Vanguard LifeStrategy range gets pretty close to it in putting together an asset allocation on a “set and forget” basis and populating this with its own index funds.’

Counting the pennies

Goldsmith believes that cost is the overriding factor driving advisers into these funds. Vanguard has reduced fees for its LifeStrategy funds three times since their launch in June 2011, with the latest reduction in January taking annual ongoing charges from 0.24% to 0.22%.

‘Investment costs are dominating thinking in financial markets at the moment,’ Goldsmith said. ‘With the move to clean share classes, charges have come down quite a lot – taking active multi-asset propositions into the 70 to 80 basis points area, but still nowhere near 22 basis points.

‘There is lots of research that we and others have done that shows that funds with low charges generally have a tailwind behind them.

‘Lower costs will provide an ongoing tailwind for the Vanguard LifeStrategy range and any new launches that are similar.’

In September 2017, Seven Investment Management (7IM) launched three low-cost, passive Ucits funds in partnership with risk-profiling firm Distribution Technology.

The funds invest in a range of asset classes, including equities, government and corporate bonds, index-linked gilts, cash and near cash, real estate, and certificates of deposit, via exposure to futures and funds. They have an ongoing fund charge of 29 basis points.

Tom Sheridan, chief executive of 7IM, said: ‘This launch will offer advisers and their clients the combined expertise of 7IM and Distribution Technology at low cost.

‘7IM was a pioneer in providing passive investment solutions to the retail market, using passive and smart passive implementation in funds, model portfolios and discretionary services.

‘Distribution technology is a good fit with us, with a risk management approach which complements our own, and with a tried and tested asset allocation model, advice technology process and fund research that has earned them an enviable following amongst more than 7,000 advisers.’

Minimising churn

Other than reported charges, passive products may also have an advantage in terms of the costs that are not stated, Goldsmith added. ‘If a multi-asset fund has very active tactical asset allocation, every time the manager changes that position transaction costs are incurred,’ he said.

London-based Capital Asset Management designs and builds its own passive multi-asset portfolios. Some 80% of its clients own Vanguard funds.

Chief executive Alan Smith believes the LifeStrategy funds should be seen as a useful benchmark against which to judge any discretionary fund manager or multi-asset fund.

‘We use Vanguard funds within our portfolios and are pleased to see that as a mutual company with no external shareholders to satisfy, Vanguard continues to lower its fees as it grows and gains scale,’ he said. ‘That’s something other fund groups may want to think about.’

Cheshire-based Bridgewater Financial Services also favours passive propositions across its client bank and started using the LifeStrategy funds several years ago as a single fund solution for clients with less than £100,000 for investable assets.

‘The cost is very attractive, but the major benefit is the high-level asset allocation split between equities and bonds,’ said director Chris Wicks. ‘The funds come in a range of different blends of equities and bonds which can be used to match clients’ risk/return profiles. They auto-rebalance so the correct exposure is maintained.’

However, in April 2017, the chartered financial planner moved clients away from Vanguard and into the Dimensional World Allocation funds, which come with the same equity/bond splits and cost 30 basis points.

‘Subsequent to the Brexit vote, which is a big deal for the UK economy, we decided to avoid the UK bias in the equity content of our portfolios,’ Wicks added.


Case studies

1. Verus Wealth

Dundee-based Verus Wealth uses multi-asset passive vehicles for lower-value clients in the accumulation phase, who typically do not pay for its ongoing review service.

‘We don’t provide an ongoing service for investments of less than £250,000, so it’s in cases below this threshold that we may offer limited or focused advice without ongoing fees, and would tend to recommend a single multi-asset fund,’ said director Paul Lothian.

‘Most typically, this tends to be younger accumulators introduced by our joint venture partner – a firm of chartered accountants who will sometimes, for example, ask us to set up a first pension for a client.’

The financial planning firm likes multi-asset as a proposition for simplicity and ease of administration – for example, the need to manually rebalance is eliminated thanks to internal rebalancing within the multi-asset fund.

It prefers passive multi-asset rather than active offerings for the same reasons it uses passive over active funds in its in-house portfolios: lower cost, wider diversification and no speculation at either stock or sector level.

Verus was using the Vanguard LifeStrategy funds before the price reduction, but Lothian recognises that ‘any cost lowering is welcome as it allows our clients to keep more of the returns’.

‘As well as Vanguard’s LifeStrategy range, we also use BlackRock’s Consensus fund range and Dimensional’s Multi-Factor fund range, depending on the platform being used and the desired target asset allocation,’ added the chartered financial planner and chartered wealth manager. ‘We’ve also recommended Standard Life’s MyFolio Market multi-asset funds in the past under insured product wrappers.’ Paul Lothian


2. Tom Munro

Tom Munro Financial Solutions favours a blended approach of passive and active funds for most of its clients, but when it comes to multi-asset investing it plumps for active managers.

The reason for this is the ability of active fund managers to consistently deliver a robust level of income.

Tom Munro, director of the Falkirk-based firm, said: ‘Although we tend to use a combination of active and passive strategies in most client portfolios, gaining exposure to a globally diverse mix of asset classes or styles through active management remains our preferred route for multi-asset investing.

‘This is mainly down to the income requirements of our conventional demographic and our pursuit for natural yield.’ For clients approaching retirement, risk profiling and cashflow modelling are paramount. Cashflow modelling calculates the yield required to sustain a client’s lifestyle based on the investible assets accumulated – typically 4%.

‘Targeting a 4% annual yield, the Henderson Core 4 Income portfolio is a good example of consistently delivering not only this income, but also long-term capital appreciation,’ Munro said.

‘Some would argue, of course, that the ongoing costs exceed the average passive equivalent, but this is by less than 50 basis points as I can access the Henderson portfolio for 0.71% through the Succession platform.

‘The all-important yield is where value is added as natural yield over capital withdrawals tends to suit many of our clients and helps preserve their capital. With the average annual yield on a passive counterpart averaging around 1.75%, the small additional charge is worth it.’ Tom Munro

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