Where are Multi-Asset funds investing?

23 June 2016

Mike Turner, Research Manager

We know that traditionally Multi-Asset funds will invest predominantly in a mixture of Equities, Fixed Income, Property and Cash however is this the reality? In this article we’ll examine where Multi-Asset funds are investing.

A common method of segmenting the Multi-Asset universe is to use Investment Association sectors which segment the fund universe using defined asset allocation parameters. The main IA Multi Asset Sectors are:

Mixed Investment 0-35% Shares

Mixed Investment 20-60% Shares

Mixed Investment 40-85% Shares

Flexible Investment

The below chart displays the average asset splits for each sector

Firstly we can see from looking at the chart that the Flexible investment sector has a higher average weighting towards equities than Mixed Investment 0-35% Shares and the opposite is true for Fixed Income which is what we would expect due to the asset allocation parameters for each sector.

With the previous paragraph in mind, we can see that although fund managers are managing to sector parameters when we take a more granular view at a geographic level and the different Bond and Equity geographic categorisations, we see that fund managers are choosing the same geographic categories across IA sectors.

Looking at the chart we can see that Fund managers on average have placed greater weighting in Global Fixed Income over UK Corporate Bonds and Gilts; the likely reason being the uncertainty caused by the EU referendum.

Looking at the Equity Allocation, interestingly, we can see that UK Equity on average has a higher weighting than Global Equity sectors. With North American Equities as the second highest weighting followed by Emerging Market Equities. We might assume the high weighting to UK Equity could be attributed to Fund Managers opting for UK Equity as a preference to Global Equities but with Brexit around the corner this would seem counterintuitive.

If we look at how Equity markets have been performing, mid-way through the last year the American equity markets and European equity markets were closely correlated. However in the lead up to Brexit the European Equity indices have experienced decline likely due to the economic uncertainty associated with Brexit. Whilst European Equity indices have been declining, the States have experienced a strengthening Dollar and Equity markets have stayed afloat.

There could be other factors coming into play that lead fund managers on average to have a large UK Equity weighting. One of the reasons being that these funds tend to invest in established currencies such as US Dollar, Sterling & Euro. To reduce currency risk, a fund manager could hedge the currency of the investments that aren’t in these established currencies however this could raise the cost of the fund. Another reason could be home bias, this is where fund managers have a preference to invest in their domestic markets.

To conclude, Multi-asset funds, as we’ve seen are investing in differing broad asset classes such as Equity, Fixed Income and cash but they are further diversifying by geographical regions. It’s important to remember that there’s likely to be a bias towards domestic markets and established currencies such as US Dollar, Sterling and Euro.

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