Multi asset funds allow switches between underlying funds without triggering capital gains tax

Jacques du Plessis, chief investment officer at AlphaWealth.

Multi asset funds are an ideal way for retail investors to postpone a Capital Gains Tax (CGT) event while offering superior performance and lower risk than equity funds, according to Jacques du Plessis, chief investment officer, AlphaWealth.

The ability to postpone the CGT event which may be triggered by selling one fund or asset class to buy another is a distinct advantage of both multi asset and multi manager funds. In the case of a multi asset fund class, the manager can switch between asset classes (for instance, reduce equity and increase bond exposure) or between underlying investment funds without triggering CGT for investors.

“Multi asset funds have evolved from stagnant asset allocation models. Today it’s about managing a more multi-dimensional and expanded opportunity set,” he says. “The average balanced fund has not only outperformed the market over the last two years, but has done so at half the risk.”

Invest SA estimates that South Africa invests about R988 billion into multi asset funds annually, more than half of total industry assets — double that of equity funds.

Du Plessis says one of the reasons for the popularity of multi asset funds is that they protect investors from themselves. “Retail investors typically sell at the bottom and buy at the top. With these funds, the responsibility rests with the manager rather than the investor. In addition, because investors have peace of mind that someone else is responsible for the assets, they tend to stay the course and ultimately get better returns,” he explains.

Exposure to a broader range of asset classes is attractive, with many mandates allowing managers to provide both on and offshore investments in equities, bonds, properties and commodities. In the case of multi manager funds, they also provide exposure to different investment styles like value and growth investing. “As we have seen over the past couple of years, investment styles can have a significant impact on returns,” says du Plessis.

Multi asset funds also have some disadvantages: costs can be higher and the range of returns between various managers can be significant. Finally, in a persistent bull market for equities, the diversification of the portfolio means that the multi asset fund can potentially lag an equity index for a period of time.

A multi asset fund is a combination of asset classes such as cash, equity or bonds used as an investment.