Multi-asset funds can help steady the ship

Multi-asset funds fell out of favour during the prolonged low-interest-rate environment following the 2008 global financial crisis. However, the landscape shifted post-COVID with heightened economic worries prompting a resurgence in multi-asset strategies.

With interest rates set to remain higher for longer, investors are still seeking diversification with minimal risk. In this context, multi-asset income funds remain an attractive option with many funds in the sector being well-positioned to navigate upcoming equity risks and market uncertainties.

Multi-asset funds offer diversification benefits

A key benefit of multi-asset income funds is that they typically provide access to a wider range of asset classes and geographies, such as equities, bonds, cash, real estate, infrastructure and emerging markets.

The emphasis is on asset classes which are producing income, such as high-yielding bonds, real estate securities, and dividend-paying equities.

This diversified approach allows investors to leverage a variety of investments within a single fund, potentially offering relative stability during periods of market volatility.

Unlike managed funds, the performance of multi-asset funds is not tied to a specific benchmark. Instead, they generally focus on achieving specific investment goals, such as outperforming inflation.

Furthermore, most multi-asset income funds are actively managed to optimise returns. The ability to adapt to evolving market conditions, such as adjusting the fund's allocation to equities in response to attractive investment prospects, is key to performance.

So multi-asset funds are particularly useful for investors who are aiming to generate consistent long term returns with minimal volatility.

Key considerations before investing

Diversification alone is not enough to generate strong longer-term investment returns.

Given the macroeconomic uncertainty and rising geopolitical risks globally, investors need to adapt their portfolios to safeguard against equity risks and to capitalise on market opportunities in other asset classes including bonds, credit, property, and private equity.

With navigating these challenges in mind, there are five key themes that investors interested in multi-asset strategies should consider prior to investing:

1. Asset Allocation Strategy: Most multi-asset funds invest in a wide range of asset classes such as stocks, bonds, cash, and alternative investments. Evaluate the fund's asset allocation strategy to ensure it is diversified across different asset classes and geographic regions. Look for a strategy that aims to achieve a balance between risk and return with a long term investment horizon. A well-diversified portfolio can reduce volatility and provide more stable long-term performance.

2. Fund Manager Expertise: Evaluate the expertise and experience of the fund manager or management team. Look for managers with a proven long term track record of successfully managing multi-asset portfolios and navigating different market environments.

3. Liquidity: Consider the liquidity of the fund's underlying investments, especially if you may need to access your funds in the short term. Illiquid investments can pose challenges during market downturns or when investors need to sell their holdings.

4. Fund Size and Asset Under Management (AUM): Consider the size of the fund and its AUM. While larger funds may offer economies of scale and greater liquidity, excessively large funds may face challenges in deploying capital effectively or generating alpha.

5. Investment Philosophy and Process: Understand the fund's investment philosophy and process. Look for a disciplined approach that is consistent with your own investment beliefs and objectives.

Once you’ve addressed these considerations you’ll be well-placed to understand whether multi-asset strategies are a good match for your portfolio.

Adapting to market realities

With markets lowering their expectations regarding the Fed's ability to cut interest rates this year, investors would do well to focus on market segments that are equipped to withstand prolonged higher rates while holding if global economic conditions moderate.

Multi-asset funds offer income seekers a diverse range of investments in a single fund, providing stability during periods of market volatility. But balancing yields and risks is crucial for generating consistent growth and income.

Disclaimer: This article is prepared by Ankita Rai. It is for educational purposes only. While all reasonable care has been taken by the author in the preparation of this information, the author and InvestmentMarkets (Aust) Pty. Ltd. as publisher take no responsibility for any actions taken based on information contained herein or for any errors or omissions within it. Interested parties should seek independent professional advice prior to acting on any information presented. Please note past performance is not a reliable indicator of future performance.