"However, a lot of them use their own funds rather than taking a fund-of-fund approach. By drawing upon the expertise and due diligence of their in-house teams, they can have one standardised approach and methodology for stock selection and screening.”
Morris adds that a thorough risk assessment process would help build resilient portfolios: “In terms of risk assessment, most multi-asset funds are risk managed and will ensure their funds align to the risk ratings of the main risk profile tools such as Dynamic Planner and Defaqto.
"Many of them will focus on managing downside risk through active fund management. Although that's a whole other debate. And with regular rebalancing, passive funds can also be kept within required risk parameters.”
However, despite these reservations, Daniel Elkington, chartered financial planner Keep It Easy, says multi-asset portfolios are positioned well to fulfil stewardship responsibilities because the manager can take a nuanced approach in terms of investment decisions.
Elkington says: “Multi-asset, as opposed to multi-manager, directly involves itself in investing in stocks, bonds and so on.
"Therefore, the manager can more easily apply what we might describe as an impact style, where they can get directly involved with lending to companies that will spend the money on specific projects and therefore be more nuanced in terms of investment decisions.
"For instance, lending money to BP to build solar farms seems like a worthwhile project, whereas just providing general lending wouldn’t.”
He adds that sustainable investing is considered lower risk, so it is vital that asset allocation methodology takes this into account, especially considering the higher costs of running such strategies.
He says: “Returns are generally better on a risk-adjusted basis over the longer term, ergo it is prudent to ensure that the asset allocations are specifically designed for the specific elements of the multi-asset strategy as opposed to a more generalist approach.”
Learn the rules
There is no denying that ESG is on the rise. As such, Morris adds that is it important investment firms get to grips with ESG rules because the sector will continue to grow.
Morris says: “ESG is a style of investing that will very likely continue to pervade how we invest during the era of net zero targets. And that's just the environmental element. Funds with a social focus are just starting to gain meaningful traction. And good governance is vital to any fund.”
His comments follow research by Triodos Bank UK this year, which found that investors now expect their fund managers to do much more than assess risk and return, but also help them navigate sustainability issues in much greater depth.
