“As well as offering growth and diversification across asset classes, investment ideas and strategies, they should also offer the careful management of directional risk,” says Merrit. “The ability of a skilled manager to have both long and short positions in a portfolio adds to the potential for returns while also being an important risk management tool.”
Tamsin Evans, managing director, P-Solve, welcomes the innovation, but says care is needed about how the range of these funds are categorised, because ultimately, investors need to understand what kind of fund they’re buying.
“Some funds utilise lots of long-only exposure that rotates across asset classes and may or may not use more niche investments and these can form a very large part of people’s portfolios,” says Evans. The other extreme requires more relative value and therefore more derivate and alternative exposure, she adds, and are more specialist as they move towards the hedge fund end of the multi-asset spectrum.
“Though most of the developments are towards the hedge fund end of the spectrum, if you’ve a fund that’s a large part of your portfolio and you’ve seen a meaningful move into niche or alternative assets or it has become more derivative-based, then perhaps you should be concerned, because that may not be what you bought. However, if you’re buying at the other end of the spectrum, that’s exactly what you might expect,” she says.
Ultimately, a trustee shouldn’t buy any product without understanding at least at a high level what they’re buying it for and the type of performance they’re likely to get in different market conditions, she adds. That requires an understanding of what the manager is trying to achieve and the instruments they are using, so in theory, there should be no difference with a multi-asset DGF type fund. In practice, that can be different.
One thing to watch for is the difference between what a manager is doing and how they are explaining it to the trustees, says Evans.
“It’s not that they’re not trying to hide anything,” she adds, “but sometimes asset managers are not that well versed in talking to institutional clients – especially pension schemes – and understanding exactly what the end buyer the pensions scheme is worried about.
“That is where the adviser has to step in and do a very detailed level of due diligence to understand if the way the managers say they’re running money really is the way they’re doing it.”
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