Using Flexible Funds in Your Portfolios

Tim Murphy, Morningstar Manager Research  |   23rd Sep 2021  |   6 min read

Highly flexible multi-asset funds are now commonplace in the menu of investment options available in Australia. These strategies emerged soon after the global financial crisis as a response to the poor performance of many Strategic Asset Allocation, or SAA, funds, which suffered severe drawdowns during that period. And, the space has mushroomed since.


Flexible asset allocation funds were created in an attempt to address the issues of strategic allocation strategies, hoping to exploit manager skill to time markets and position in anticipation of severe risk-asset drawdowns.

While sometimes marketed as a standalone whole-of-portfolio options, regulatory and practical constraints often preclude their use in such a way. In particular, adviser-run money must be invested across defined risk profiles which mandate strict bands of allowed growth and defensive asset splits. Therefore, investors have looked to blending these flexible strategies within their existing mix of assets.


Why Allocate to Flexible Funds?

Opportunities often appear in markets. With sufficient scale and research resources, flexible funds should in theory be able to make the most of these opportunities by tactically tilting their portfolios at opportune moments.

The key advantage of this approach is the diversification potential it offers across:

  • Risk and return drivers. While flexible funds may have similar return targets to SAA portfolios, their asset allocation mix can vary significantly.
  • Investment thought. The approach to markets espoused by these strategies is markedly different to a standard SAA fund.
  • Investment objectives. There is a diverse universe to choose from in the flexible allocation category – with higher and lower return targets, or a specific focus on return generation or capital preservation. With a bit of research, it is possible to pick the right strategy to complement a range of financial objectives.


Who Can Benefit Most from These Strategies?

Very broadly, we can think of two classes of investors:

Investors in accumulation are most sensitive to shortfall risk – i.e. the risk of superannuation assets not being enough to fund retirement. Investors at this stage of their wealth creation journey have much more time to weather market downturns.

Investors in decumulation are most sensitive to sequencing risk – i.e. the risk that the timing of investing returns is unfavourable, particularly due to unexpected volatility in returns or large drawdowns.

Investors in late accumulation or throughout decumulation stand to benefit the most from flexible strategies. With less time to weather downturns, the added protection from severe drawdowns can be highly beneficial.


How Can Flexible Strategies be Used in a Portfolio?

Overall, our recommendation is that flexible strategies are best used in the context of Balanced, Moderate or Conservative risk profiles. This is where their diversification benefits will be most felt, especially in regard to sequencing risk.

Aggressive and Growth profiles, which are less susceptible to sequencing risk, benefit less from allocating to flexible strategies – but should still enjoy improved risk-adjusted returns over the long term.


What Flexible Funds does Morningstar Cover?

We classify 68 funds in our database as belonging to this class of strategy, representing over AUD 9 billion in assets under management. This money is concentrated across a few individual firms, particularly AMP, MLC, PineBridge and Schroders.

As for our coverage in the space, we cover 10 individual funds which total about AUD 5 billion in assets under management. To access our full report, please log into your Morningstar Direct or Adviser Research Centre portal today. If you do not have current access, you can request a free trial here.

Originally posted 2018-11-20 12:20:09.

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