Mr Justham extrapolates: "With a multi-asset fund, there is a clear correlation between the level of equity/bond content and the risk.
"As a rule of thumb, the higher the equity, the greater the risk; the inverse is the same for the bond weighting. This can be a guide as to what may be appropriate for the client's risk profile.
"However, understanding the rationale behind a fund manager's investment process is important in assessing what may be appropriate here, as there can be a big difference between a 'static' asset allocation, and one that tactically adjusts according to the environment."
He adds the style of the manager will also inform the adviser on how his or her view of the world is implemented - whether through in-house solutions or best-of-breed third parties.
"Lifting up the bonnet and gaining an appreciation of the driving factors behind returns is a useful exercise."
For Andrew Harman, portfolio manager of the First State Diversified Growth fund, because the aim of investing is to achieve financial goals, one should ask whether the fund has delivered the required return over the investment horizon, for example whether it is to achieve cash plus 5 per cent or inflation plus 4 per cent.
He explains: "Achieving the investment return over the investment horizon is a key criteria in evaluating objective funds. Being too conservative could be risky as the fund may fall short of meeting its investment target."
Another question he believes advisers should ask is how the fund performed after adjusting for risk. Often this can be done using the Sharpe Ratio, which is a measure for calculating volatility adjusted excess return for a fund. It is calculated as the return earned in excess of the risk-free rate per unit of volatility.
"This provides investors with a tool to evaluate funds with similar return objectives and investment horizons," he states.
Managing large drawdowns
Mr Harman believes it is also important for advisers to pay heed to how often large drawdowns occur on the fund, and how long it takes for the portfolio to recover, as this could present a significant risk to some clients.
"A drawdown is the peak-to-trough decline over a period for an investment. The maximum drawdown provides an indication of the worst loss one would have experienced had they withdrawn their capital at an unfavourable time in the market cycle.
