Suitability, dynamic asset allocation, diversification and cost-effectiveness are the four key pillars multi-asset funds should have, according to Legal & General Investment Management’s Justin Onuekwusi.
Onuekwusi said five years ago, before he and his team decided to launch the five-strong risk-targeted Multi-Index range, they decided to speak with advisers to find out what investors really want from multi-asset portfolios.
During the process and after the implementation of the retail distribution review (RDR), which aimed to drive transparency and fairness in the investment industry, the manager said the number of risk-rated funds has increased.
Most of these, he said, now come under names such as “cautious managed”, meaning risk-taking by the strategy can drift over time, failing to stick to the investors’ initial risk profile.
With the aim of avoiding the drifts in the amount of risk taken, the team decided to make their funds risk-targeted, reflecting a commitment to adhere to the investors’ risk profile.
This suitability, he said, is the core of a risk-profiled strategy, a vehicle that shouldn’t just be suitable initially, but on an ongoing basis.
“What you have seen post-RDR is a number of funds that have taken their existing strategies and gone to risk profiling companies and said to them: ‘rate us’.
“But the challenge there is, because the manager isn’t targeting a risk profile all the time, he can get drifted.
“A cautious managed fund can be rated as a four [on a risk scale] but because they have as a target to outperform their peer group, their risk can drift over time, because they are only risk-rated, not risk-targeted,” Onuekwusi explained.
Performance of funds since launch
Source: FE Analytics
The next pillar is cost-effectiveness, which the manager of strategies such as the £924.4m L&G Multi-Index 5 fund said is difficult in an environment of increasing competition where managers are cutting their fees.
“Advisers have said to us, this is the second-most important thing for a multi-asset portfolio: to get value for money,” he explained. “I don’t think active managers are the only ones that charge a lot for their services, index funds as well.
“If you look at the last 10 years and you look at the mixed investment sectors, you find that the managers that have the highest fee typically sit on the bottom end of the rankings. The managers that charge the least have been towards the upper end, they have been the outperformers.”
“What does that mean? Are the most expensive multi-asset funds the best performers over the last ten years? he asked. “No, you haven’t necessarily been rewarded by premium products.”
“I think the asset management industry is waking up here and actually you’ve seen a lot more competition after RDR. In our case we are not the cheapest, but the most cost-effective,” Onuekwusi explained.
Dynamic asset allocation, or a dynamic approach to manage the overall risk of a portfolio while generating returns, is the next of the key pillars supporting multi-asset strategies.
“What advisers said is that they wanted someone who manages the overall risk of the portfolio and generates returns. We think the way to do that is to be dynamic,” said the manager. 
“That means your asset allocation moves over time as you try to find value and you try to manage risk. Asset allocation is a key driver for risk and therefore returns on a multi-asset portfolio, he said.
According to the LGIM manager, the industry spends a lot of time on manager selection and the focus tends to be on, for example, which manager is focused on US equities or who is running UK equities.
But the risk in asset allocation is how much of the portfolio is allocated to the various asset classes rather than which manager is overseeing them.
He added: “Asset allocation is what dictates the overall risk. As a multi-asset manager, you have two ways of dealing with asset allocation: you can keep it static or dynamic.
“The challenge when it is static is: are you managing the risk over time? If it is dynamic however, you can do things like, for example, when Brexit comes – if it comes – you can reduce your UK equities exposure.”
That dynamic asset allocation, while looking through short-term noise, is a key force driving returns, the manager said.
“What I am not doing is coming in the morning and trading half a per cent here or there. What we do is take big positions to take advantage of medium term trends in the market,” he explained.
The final key characteristic a multi-asset strategy should have according to Onuekwusi, is diversification, which should be the foundation for any asset-allocation team.
“Diversification is probably the only free lunch left in investing: it’s spreading your risk over different asset classes, it’s taking the multi-asset concept to the extreme,” the manager explained.
“We believe that, over time, diversifying across all asset classes is the best way to create an efficient portfolio. You won’t see a huge UK bias in our funds.”
Although diversification may hamper returns over the short-term given the current US growth-dominated investment backdrop, the manager noted it can pay off in the long term.
He added: “As we are coming to late-cycle and we are moving to an environment where the market is starting to think when the next recession is going to be, volatility is going to pick up. So, diversification is going to be more and more important.”
The £924.4m L&G Multi-Index 5 fund is part of a range of five risk-profiled funds (where the risk profile ranges from 1-10 with 1 being the least risky, and 10 being the most).
The fund range aims to provide a combination of growth and income while remaining within a pre-determined risk profile. The level of risk is managed by restricting the types and proportion of assets it holds.
Since launch, the five FE Crown-rated fund is up by 42.86 per cent compared with a gain of 35.89 per cent for the average IA Volatility Managed sector fund.
Performance of fund vs sector since launch
Source: FE Analytics
L&G Multi-Index 5 has an ongoing charges figure (OCF) of 0.31 per cent.