So, surely it follows that investing in just one fund could leave you over-exposed to the performance of a handful of assets? Depending on the fund, this might be true – but it is not necessarily the case for every fund.
Taking a step back, remember why diversification can be a good idea in the first place. Above all, it is a way to help protect you from the ups and the downs, or volatility, that every type of asset can experience, as well as from the possible failure of individual investments.
You can never guarantee against investment losses, but if your portfolio is effectively diversified, its value – and the returns you’ll get – will usually be less volatile over the course of the economic cycle.
This is because most asset classes have historically tended to perform differently in the same conditions. For instance, in 2008, government bonds delivered solid returns even while stock markets struggled. In 2009, this performance reversed. Within a well-balanced portfolio, underperforming assets can hopefully be offset by others that have little or no correlation to them.
The multi-asset option
Funds focused on one asset class will package several investments, but the returns they can deliver for investors will always hinge on how that type of asset, whether comprising company shares or bonds, performs over a given period.
Multi-asset funds look to offer a more rounded investment option by holding a blend of different kinds of assets.
These funds can hold assets, such as property, whose performance has historically had little connection with the likes of bonds and shares, in order to achieve more effective diversification. They might also gain exposure to assets across many regions, and in several currencies, to reduce the risk of being too exposed to the fortunes of individual economies.
Many multi-asset funds are actively managed and their blend of holdings can be updated to respond to changing market conditions, or even to pre-empt them. Where allocations to each asset type are not fixed, a multi-asset fund manager can act on opportunities where they see certain assets, or regions, as undervalued by the market.
One of the main attractions of investing in a multi-asset fund is simplicity. With one investment you can instantly gain access to a diversified – and professionally managed – portfolio.
Choosing the right approach for you
Investing in a multi-asset fund might be convenient, but like any investment it absolutely must be right for you. Multi-asset funds are not one and the same, and come in many different shapes. Each has its own risk and return profile, which should be reflected in the assets it holds and the fund managers’ approach to investing.
While some will aim for higher returns in exchange for assuming higher risks, others are more defensive in their approach. One multi-asset fund might focus on delivering a regular income for its investors, while the next might prioritise long-term capital growth.
Before you invest in any fund, you should always make sure that its objective chimes with your financial goals, and that its underlying assets are appropriate for your needs and circumstances.
Depending on what you want from investing your money, and the amount of risk you want to take, there might be a multi-asset fund that could offer you a suitably diversified portfolio in one fell swoop.
When you're deciding how to invest, it's important to remember that past performance is not a guide to future performance, and that the value and income from the fund's assets will go down as well as up. This will cause the value of your investment to fall as well as rise and you may get back less than you originally invested.
We are not able to give any financial advice. If you’re at all unsure about the suitability of your investment, please speak to a financial adviser. The views expressed in this document should not be taken as a recommendation, advice or forecast.