Investors in UK-based multi-asset funds may be unwittingly exposed to a higher level of risk because of mislabelling, according to a recently released report that calls for a radical reset of the multi-asset market.
The mislabelling is just one of the flaws in the increasingly popular multi-asset fund market highlighted by a whitepaper from research firm Asset Intelligence.
The report, ‘The Great Multi-Asset Reset’, studied the UK's multi-asset space and concluded that it has a lack of true diversification, is biased towards UK assets and has too little active management.
This has resulted in more than £22 billion (€25.55 billion) assets under management languishing with chronic under-performers.
Furthermore, the mislabelling issue is producing “a poor outcome for clients” who are unaware of the risks they face.
The problem, states the report, is that the majority of multi-asset funds are defined by their exposure to equity markets but not to other risky assets such as emerging market bonds.
Some of these assets act like equities despite being categorised as otherwise.
By leaving them out of the fund’s ‘risk’ categories, investors are left exposed to assets they wrongly think will give them protection against a downturn in the equities market.
“At the heart of this problem is a labelling issue,” said Robert Love, head of research and principal at Asset Intelligence.
“Many multi-asset funds include many different asset classes, but by mislabelling these assets, they have been making investments in the part of their portfolio considered to be defensive, only to find it is anything but,” said Love.
Advisers should instead examine more closely just how diversified multi-asset funds are, said Love.
“It was a nice marketing idea to put a collection of assets into one fund and call it portfolio management, but the reality is that in many cases multi-asset funds offered to advisers and their clients don’t offer investors the risk profile they think they do,” said Love.
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