Definition, Strategies, How to Invest

  • Multi-asset funds are made up of different asset classes such as stocks, bonds, commodities, and real estate.
  • They provide an easy way to spread your money among different investments to reduce risk.
  • While multi-asset funds offer an easy path to diversification, there are drawbacks such as higher fees.

Diversification in investing is a common practice where you spread your money among a range of different asset classes and securities. The idea is to limit your exposure to any one type, which can reduce risk and improve performance.

Building a portfolio that strikes the right balance between stocks, bonds, commodities, real estate, and a range of other types of investments can be complicated and time consuming. A simpler way to do so is through multi-asset funds.

What are multi-asset funds? 

Multi-asset funds combine different asset classes into a single portfolio. Buying shares of these funds is a way for investors to achieve diversification without having to do the research and analysis involved in choosing individual investments and allocating the appropriate amount of money to each of them.

While there are many types of multi-asset strategies, the basic idea behind all of them is that by holding a range of different types of investments, you reduce the risk of losing a lot of money if any single asset class declines sharply.

For example, if you invest in a mutual fund that only holds stocks, and the equity market crashes, you’re likely to suffer losses of a similar magnitude. However, if you have a fund that also invests in assets that tend to do better when stocks fall – such as Treasury bonds or gold – they could offset those losses.

That’s not to say that multi-asset investing always works out better than single asset-class investing or that asset classes always move in different directions. But many investors aim for diversification.

“The fundamental key of successful long-term investing is diversification,” says John Kauth, CEO of Intercontinental Wealth Advisors. “It’s not market timing. It’s not mutual fund selection. It’s not stock selection. It’s asset allocation. And that’s what a multi-asset fund does for you.”

How multi-asset investing works

Multi-asset strategies can be accessed through vehicles such as mutual funds or exchange-traded funds (ETFs).

Some managers build portfolios that are mainly focused on allocating to a mix of stocks and bonds. Others include a much wider range of asset classes, such as investing in real estate and infrastructure alongside equities and fixed income. These strategies could be based on several different types of goals, such as aligning with a specific risk tolerance or providing regular income from dividends.

In theory, investors could typically allocate to the same types of asset classes on their own. An individual could fairly easily put, say, 60% of their money into a diversified equity ETF and 40% into a diversified bond ETF. However, that requires more work on the investor’s part. Plus, their strategy might differ from that of the fund provider, and they might not always have access to the same types of investments as a professional fund manager.

“If you’re not a really sophisticated investor, or you don’t have a lot of time to do this, they’re the perfect vehicle, because the fund is going to [handle diversification] for you,” says Kauth. 

In addition to choosing the overarching investment strategies, multi-asset fund managers often handle aspects like rebalancing. That means if there’s a market shift that throws off the targeted asset allocation, they’ll buy and sell assets to rebalance it. Kauth says it could be difficult for some individual investors to do that on their own.

“If you’re managing your own portfolio, you may not rebalance it all the time, or you might panic and irrationally buy or sell,” he says. 

Types of multi-asset funds 

There are many types of multi-asset funds with varying goals and asset-class mixes. Some are geared toward providing a particular type of diversification. Others focus on objectives such as preparing for retirement.

Some examples of different types of multi-asset funds include:

  • Target-date funds: These are retirement-oriented funds that allocate to a mix of assets based on the investor’s approximate retirement year. As the target date nears, the asset allocation adjusts. For example, a 2050 target-date fund might hold a much higher weight of equities than fixed income in 2022, but as it gets closer to 2050, that balance will shift.
  • Balanced funds: Balanced funds provide exposure to multiple asset classes based on target percentages, such as a 60/40 split between equities and fixed income.
  • Risk-based funds: These types of multi-asset funds are often named according to the target risk level, such as conservative, moderate or growth. A multi-asset fund with a higher risk target might have more equities than fixed income, for example.
  • Total return funds: Some multi-asset funds are designed to try to avoid downturns and provide positive returns in any market environment, so the asset mix might try to reduce downside risk.

Benefits and drawbacks of multi-asset funds

Multi-asset funds can help investors diversify their holdings, but they’re not the best fit for everyone. For example, a target-date fund could provide an investor with an easy way to plan for retirement, yet some people want to adjust their holdings on their own, rather than follow what the target-date fund provider chooses.

Some of the top benefits and drawbacks of multi-asset funds include the following:

How to invest in multi-asset funds

Many asset-management firms offer multi-asset funds. Much as you might invest in stock funds through providers like Vanguard, Fidelity or BlackRock, you can also find multi-asset funds through them and others.

“It’s easy to research,” says Kauth. “Just Google, ‘Best multi-asset funds.’ There’s a lot of disinterested third parties who do a good job of ranking them.”

Still, keep in mind that some types of multi-asset funds will be better fits for certain types of investors, depending on factors like your risk tolerance.

“You need to do your homework in terms of figuring out what are the good ones and how much risk do you want to take,” adds Kauth. “Because some funds will be riskier than other ones depending on the weightings of the various asset classes.”

If you’re working with a financial advisor, however, they might provide their own asset allocation recommendations and handle aspects like rebalancing, rather than directing you to a multi-asset fund.

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