Maximising client outcomes with multi-asset portfolios

Diversified managed funds could make an ideal addition to a managed account, as the broad toolset available to the fund manager enables them to seek outperformance and manage risk, according to Allan Gray.

Managed accounts have seen phenomenal growth within Australia and have come to dominate the multi-asset industry. Separately managed accounts saw a 34 per cent increase in funds under management in the 2023 financial year, growing from $70.6 billion to $94.9 billion.

In a conversation on Money Management’s Meet the Manager series, Chris Hestelow, investment specialist at Allan Gray, described how despite the rise in popularity of managed accounts, there is still an important place in client portfolios for diversified managed funds held either in or alongside managed accounts.  

“Some diversified managed funds have a broad toolset available to them, which can be used to manage risk and seek outperformance, but the manager has to have the remit to make best use of those tools,” Hestelow said. 

“Flexibility is key,” Hestelow said. “If you believe an active fund manager has the skill to outperform, you have to give that manager the flexibility and opportunities to make active investment decisions. Not all diversified funds can do this, a traditional balanced fund, with a rigid 60/40 split between growth and income assets, will actually be quite limited in its asset allocation. To maximise investor returns, capital really needs to flow to the most attractive opportunities, whether that’s in domestic or global equities, domestic or global government bonds or corporate bonds.”

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Building a portfolio from the bottom up, using individual securities rather than a building block approach of underlying managed funds and ETFs, enables the manager to make full use of the flexibility. 

“Investing from the bottom up means the manager can analyse the entire capital structure of a business and decide which securities are most attractive, equities, bonds or hybrid offerings,” Hestelow said.

Maximising client returns is top of the list for many advisers, but managing risk is also up there, according to Hestelow. 

“Derivatives are a useful tool to manage risk at a portfolio level. You can buy an individual stock that you think shows promise, but short the market it trades in if that market is overly expensive in aggregate.

Currencies can also be actively managed. In other words, you can reduce portfolio risk, without necessarily diluting returns.” 

Allan Gray Australia runs a Balanced Fund which is a diversified managed fund investing in equities, fixed income and cash. It can also use forwards and futures. It seeks to be flexible to take advantage of the best market opportunities regardless of geographic location or asset class.

The fund’s benchmark is 60 per cent in growth assets, 40 per cent in fixed income and cash, but these parameters can vary widely from up to 90 per cent in equities and as low as 10 per cent in defensive.

Hestelow said the fund suits those investors who are looking for capital growth and income, and who have a time horizon of at least three years. 

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