Multi-asset funds: passive strategies are succeeding

Holding a diversified portfolio continues to make sense. By spreading investments across asset classes, you reduce the overall risk in the portfolio. Diversifying across asset classes such as stocks and bonds has proved to be a solid strategy over the long term, as bonds often serve as a portfolio ballast during equity sell-offs.

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Multi-asset funds also encourage better investor behaviour. Morningstar’s Mind the Gap study found that multi-asset funds’ lower volatility makes investors less likely to make knee-jerk reactions during market downturns.

Mind the performance gap

Despite their many benefits, multi-asset funds have struggled against benchmarks. Over the past decade, the average fund (those available to UK investors) in the 40-60% equity Morningstar category lagged its Morningstar index by nearly 1.5 percentage points annually.

Funds’ fees are the main culprit and explain the largest part of this underperformance against costless benchmarks. Managers’ asset allocation choices, security selection, and market timing also detract from performance, on average.

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The dominance of US equities, and ever-increasing market concentration over this period, made beating benchmarks even tougher.

Fees are typically lower for UK investors

UK investors, however, are in a better position than their European counterparts. Funds for European investors in the Moderate Allocation–Global category have underperformed even more, trailing their benchmarks by around 2.4 percentage points annually, partly due to higher fees on the Continent.

The median yearly fee for UK investors in the 40-60% equity category sits at 1.00%, while the European equivalent charges 1.46%. Regulatory differences help explain the gap. In the UK, the ban on commission payments and FCA regulations, such as the Assessment of Value and Consumer Duty, have kept fees in check.

Passive strategies proving popular

Index-based multi-asset funds have made a big impact on the UK landscape, led by Vanguard’s LifeStrategy range, which has amassed £46 billion in assets since launch in 2011. Other heavyweights Aberdeen, BlackRock, HSBC and L&G Investment Management manage over £50 billion collectively in similar strategies for UK investors.

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Meanwhile, traditional active fund-of-funds structures, which layer fees from both the manager and underlying funds, and so can end up relatively costly, have lost favour overall in the UK. Fund firms have evolved ways to lower costs through other approaches, such as by tapping in-house funds, or with their managers carrying out asset allocation and direct security selection themselves.

UK multi-asset fund fees have been dropping for years, with the median cost of a newly launched share class nearly halving between 2010 and 2024.

The outlook for multi-asset funds

For UK investors, regulation, investor preferences, and the rise of index-based strategies have created a competitive landscape that favours lower costs. While costs are just one consideration when choosing a multi-asset fund, keeping costs low is a key ingredient in achieving competitive long-term returns.

Tom Mills is principal, multi-asset strategies, at Morningstar.