Multi-asset funds in Kenya have given both retail and corporate investors diverse exposure to safe and highly rewarding opportunities in the global markets.
As the name suggests, the main strategy for these funds is diversification, meaning the investment portfolio is distributed across multiple asset classes globally.
The idea is that different investment assets react differently towards various market events, in a way that when one asset underperforms, its overall impact on the portfolio will be significantly reduced by the other assets that have performed well.
While diversification cannot completely eliminate risk, it is an effective way to enhance the overall investment return in the long run.
Therefore, investment diversification is an important tool in investment risk management and limits the impact of a market event on a portfolio, as opposed to single-asset investments that often bear the wrath of intrinsic risk exposure.
Asset allocation is the cornerstone of any successful investing journey. Multi-Asset funds managers are responsible for making investment decisions on behalf of the investors.
This is usually done by using proprietary methodologies to tactically shift risk exposures, taking advantage of short-term opportunities and managing short-term risks during volatile markets.
The various asset classes in multi-asset funds include a stock component that helps in capital appreciation; a bond component that helps in capital preservation; a precious metal component that acts as a buffer during periods of market volatility; a commodity element that acts as a hedge against inflation; and, lastly, cash and cash equivalents allocation that allows for a sufficient liquidity coverage for short-term resilience in managing cash outflows.
In terms of return, apart from focusing on beating a benchmark return, such as an Index fund or a treasury bond yield, multi-asset funds tend to easily outperform single-asset funds.
This is because of their flexibility in squeezing out returns from their broadly diversified options in the underlying assets.
In terms of fees, these funds have slightly higher management fees compared to vanilla funds; however, this fee is often charged on a pro-rata basis and investors are well compensated.
These funds also charge a performance fee on returns made above a set hurdle rate. A hurdle rate is simply the minimum threshold return a fund must deliver before charging the performance fee.
Importantly, multi-asset funds are convenient for investors seeking high returns, and low risk within a moderate to long-term investment horizon.
They are also most suitable for investors who are not well-versed with sufficient knowledge of the global markets or don’t have sufficient time to observe market movements and do due diligence.
Multi-asset funds also help investors to overcome human biases that they are prone to while making investment decisions.
This is the tendency of an investor to skew investments towards a specific asset class and also the reluctance to abandon the position even when supposed to exit.
It’s important to ensure that the strategy of a multi-asset fund is aligned with one's risk appetite.
The writer is a senior financial adviser, multi-asset funds.
PRESBIT