It goes without saying that the fundamental reason for investing is to earn sufficient returns to achieve your unique set of financial goals. The returns that you realise will depend to a large extent on 1) your portfolio’s asset allocation (how you diversify your investments across asset classes); 2) your investment time horizon; and 3) your ability (and willingness) to stick to your investment plan.

While adhering to your time horizon and investment plan is ultimately your responsibility, managing your portfolio’s asset allocation doesn’t have to be. Many studies have shown that a portfolio’s asset allocation, rather than any specific investments (like a stock or bond), accounts for the majority of portfolio returns over time, making it the most important decision to be made when it comes to investing. In this article, we take a look at the benefits of multi-asset funds and how they can be used to help you reach your goals.

Just as some people choose to build their personal computer by purchasing and combining individual components, so do some investors choose to build their unit trust investment portfolio by investing in various single-asset class funds (e.g. equity funds, bond funds, listed property funds). The funds are held in proportion to the investor’s desired exposure to each asset class. While this “do-it-yourself” approach may suit those who have both the time and inclination to regularly monitor and rebalance their portfolios, many investors can benefit by delegating the crucial asset allocation function to an experienced investment manager, like Prudential.

What are multi-asset funds?

Multi-asset funds have mandates that afford the fund manager(s) the flexibility to invest in a broad range of asset classes. Prudential’s fund range includes four multi-asset funds, each with a specific set of risk and return objectives.

What are the benefits of multi-asset funds?

1. Asset Allocation Expertise

Prudential’s multi-asset funds are actively managed by our Asset Allocation team, which decides on the funds’ exposure to each asset class. The team identifies investment opportunities by consistently reassessing the current valuation of each asset class relative to its long-term fair value, and readjusting exposures as valuations change.

Just as building a personal computer requires a combination of skills, knowledge and experience, so does managing a portfolio’s asset allocation to deliver superior returns. Prudential employs rigorous, deliberate and time-tested processes to ensure that our funds maintain optimal asset allocations over time.

2. Diversification

By investing across multiple asset classes that are not perfectly correlated, multi-asset funds are able to reap the benefits of diversification. This is particularly beneficial during times of high market uncertainty, like the present. The below diagram shows the performance of various asset classes and inflation (SA CPI) for each calendar year from 2009 to 2016 (and Q1 of 2017), together with the performance of the Prudential Balanced Fund and Prudential Inflation Plus Fund, both of which are top-quartile performers in their respective ASISA categories across all investment periods between 3 and 10 years (inclusive).

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You’ll notice that while the relative performance of individual asset classes can vary significantly year-on-year, the relative performance of the Prudential funds remains fairly consistent. Diversifying across multiple asset classes means that the funds are exposed to various risk factors, which serves to mitigate their return volatility. The lower the short-term volatility of your investment returns, the easier it is to stick to your investment plan when a particular asset class delivers poor returns.

3. Tax efficiency

An additional benefit of multi-asset funds is that the fund manager is able to adjust the asset allocation of the fund without triggering a capital gains event. This means that capital gains tax (CGT) is deferred until such time as you decide to sell your units. On the other hand, if you manage your unit trust portfolio using a “do-it-yourself” asset allocation approach, then capital gains tax will become liable each time you switch between funds to rebalance your portfolio.

Given the above-mentioned benefits, there has been a marked increase in the popularity of multi-asset funds over the past 10 years. The latest set of ASISA statistics indicate that the percentage of industry assets invested in multi-asset funds has increased from 30% at the end of 2006 to 50% at the end of 2016.

To determine how much you need to save to reach your goals, try our Goal Calculator. To invest in Prudential’s multi-asset funds, contact your financial adviser or our Client Services Team on 0860 105 775 or at query@prudential.co.za