David Lane, LGT Vestra Partner and Technical Director
Warren Buffett, one of the richest men in the US and CEO of Berkshire Hathaway, famously had two rules for investing. Namely "Rule No. 1: Never lose money. Rule No. 2: Never forget rule No.1”. This insight sums up neatly why certain investors are attracted to the idea of multi-asset investing. The chief attraction? The ability to place money into a range of asset classes (fixed income, equities) with the aim of diversifying and managing investment risk. An approach that has long been acknowledged as an effective and long-term method of successful investing.
We know that multi-asset investing can be achieved in a number of ways. One being a single fund solution; this could be a single fund or multi-manager solution with an individual manager that has the research and operational capability to identify the key investment opportunities and themes across the differing asset classes and/or fund groups. This approach can be a relatively effective solution. Alternatively, there is the ability to construct a portfolio of specific funds that invest in a particular asset class. These fund strategies are blended to meet the risk and return profile of the investor. Sounds simple. But there are potential traps with this method of investing that are clearly worth being sensitive to. One of the main dangers that can sink the unwary is investing in funds in a specific asset class, albeit with differing managers, and taking the view that this approach has provided the appropriate level of diversification and mitigation of investment risk. This may not always be the case and can be a major problem with portfolios that have no professional oversight. Both methods have their own merits and, as with any investment, both have their respective downsides. The key is to identify what approach works for you or your organisation in light of your investment objectives, your attitude to risk and, arguably most importantly, your values.
Consider the following example of a portfolio whose UK equity exposure was invested primarily with two different fund managers. Nothing necessarily unusual in this. But when one starts to dig deeper, one realises that both funds have a significant overlap of holdings within their respective strategies. Also the return profile of both funds also have very similar characteristics. It is an easy trap to fall into. The lesson is not to simply look at the "top ten" holdings of a fund or funds. It pays to really understand the internal mechanics of a given fund, where it is invested and how it is invested. Investors do not want to be "doubling up" on their investments in the mistaken belief that by buying different funds they are mitigating investment risk. In some situations this is simply not the case.
It is also worth remembering that certain managers have differing investment styles. With equity managers, some are categorised as "growth" investors, others as "value orientated". There is an ongoing debate as to how valid these attributions are. Nevertheless, such nomenclature can provide clues as to how a particular manager may look to invest and the types of stock that populate their respective portfolios. A solution to this problem? Appoint a professional third-party to provide the appropriate level of due diligence and research capability and mitigate the key risk that your portfolio is inadequately diversified. Not only across asset classes, but within an asset class. There will be a cost to this service but as Mr Buffett remarked "Price is what you pay. Value is what you get.”