Cost may dampen investor appeal of eclectic multiasset funds

A select group of mutual funds that can invest beyond stocks, bonds and cash are being heralded as the next great innovation, but some industry observers question whether the funds are merely repackaging an existing concept.

Beyond the usual investment arena, multiasset mutual funds are also capable of investing in hard assets such as commodities and real estate, but they can have a hefty price tag.

It is hard to see investors flocking to multiasset funds while the market is faltering, but Pacific Investment Management Co. LLC of Newport Beach, Calif., is one of the bigger names pushing the concept.

“[Salespeople from Pimco] were here trying to tell me about it,” said Richard Schroeder, executive vice president of Schroeder Braxton & Vogt Inc., an Amherst, N.Y., financial advisory firm with $220 million in assets under management.

According to Mr. Schroeder, part of their pitch was to talk about how the fund is based on ideas expressed in “When Markets Collide: Investment Strategies for the Age of Global Economic Change” (The McGraw-Hill Cos., 2008), written by Mohamed A. El-Erian, co-chief executive and co-chief investment officer of Pimco.

One of the book’s main thrusts is the need to invest in a wide range of asset classes in a global economy.

Mr. Schroeder remained unconvinced that the fund was right for his clients.

“In theory it sounds good, but I’m not sure it works in practice,” he said.

The funds can also be expensive.

For example, the $21 million Schroders Multi Asset Growth Fund (SALAX) has an expense ratio of 2.25%. The fund was launched last year by Schroders Investment Management North America Inc., a New York subsidiary of Schroders PLC of London.

In explaining the high ratio, Ron Albahary, the head of North American strategic investment solutions at Schroders Investment Management North America, said that the vehicle is a fund of funds that can invest in funds offered by other asset managers. In that sense, the fund is similar to a portfolio within a managed account, and the fund’s expenses are competitive with fees charged by such accounts, he said.

Less expensive is the $83 million Pimco Global Multi-Asset Fund (PGAIX). Launched in October, the fund has a 0.95% expense ratio.

Almost all asset classes have been moving in a downward direction, and multiasset funds are no exception. For example, Lipper Inc. of New York puts multiasset funds in two categories — flexible and global flexible funds — and both categories are down.

Year-to-date through Nov. 28, domestic flexible funds posted an average return of -27.08%, and global flexible funds returned -31.72%.

The Standard & Poor’s 500 stock index was down 38.96% for the same period.

Through the end of November, there were 125 domestic flexible and global flexible funds with more than $123 billion in assets.

Including multiasset funds in those categories is fair because to different degrees, flexible funds have the ability to invest in different asset classes, said Jeff Tjornehoj, a Denver-based senior analyst at Lipper. What they are doing is “consistent” with the strategies of other flexible funds, he said.

Not everyone agrees.

The multiasset concept — particularly as employed by Pimco — does represent an evolution beyond the traditional flexible fund, said Darlene DeRemer, a partner with Grail Partners LLC, a Boston-based merchant banking firm that specializes in the investment management industry.

It’s an evolution that other asset managers are joining, she said.

Firms such as GMO LLC of Boston and JPMorgan Chase & Co. and BlackRock Inc., both of New York, are working on multiasset products, Ms. DeRemer said.

“These are far more sophisticated than the original flexible funds,” she said. Most traditional flexible funds are limited to stock, bonds and cash. But according to Ms. DeRemer, the new breed of multiasset funds can also invest in hard assets such as commodities.

For example, the $142 million MFS Diversified Target Return Fund (DVRAX) doesn’t have offerings as broad as the funds from Pimco and Schroders but invests in currencies besides stocks, bonds and cash. The fund was launched at the end of 2007 by MFS Investment Management of Boston. The fund was down roughly 20% year-to-date through Dec. 9. The S&P 500 was down 37.39% in the same period.

It’s an asset mix designed to “deliver equitylike returns with less than equity-type risk,” said David W. Connelly, a senior vice president and the director of global retail investment product in MFS’ advisory resources group.

More such products are likely, as Mr. Connelly said he’s “confident this trend will continue.”

Some investors may be put off from multiasset funds because almost all asset classes are down, said Lawrence Jones, an analyst with Morningstar Inc. of Chicago.

Almost all asset classes have been dropping, but they have been dropping at different rates, he said. That means a well-diversified fund can help reduce volatility and protect investors from losing too much money, Mr. Jones said.

Financial advisers agree.

“I would say a multiasset fund can be good for an average investor,” said Jeffrey Feldman, president of Rochester Financial Services, a Pittsford, N.Y., firm that manages $100 million in assets.

Once such funds develop more of a track record, he said, he might be interested in using them — particularly the Pimco Global Multi-Asset Fund.

Although certified financial planner J. Michael Martin said he wouldn’t be interested in a multiasset fund, because he views asset allocation as his responsibility, he thinks such funds make sense for investors not working with an adviser. He is president of Financial Advantage Inc., a Columbia, Md.-based firm with $260 million in assets.

E-mail David Hoffman at [email protected].