Are Multi-Asset Funds a Good Investment?
A multi-asset fund is exactly what it sounds like: a fund that includes a variety of different investment types that are typically related in some way. It can also consist of just one asset class, such as residential apartments, but with multiple apartment buildings in one portfolio, as opposed to just one. Some other common names used to refer to multi-asset income funds are “blended fund” or a “fund of funds.” All of these terms can usually be used interchangeably.
Most multi-asset funds are designed in a very specific way to allow the operator to maximize the intended goal of the fund. Luckily, that goal is usually found in the name of the fund.
Most common names include some variation of “income,” “growth,” or “blended.” As you can imagine, an income fund would have very different investment criteria than a growth fund. The power of the fund is that it allows an investor an opportunity to achieve their individual goals in a way that removes the risk that comes along with investing in just one deal. For a baseball reference, it decreases your chance for a strikeout and increases the chance for a base hit. To play devil’s advocate, however, it also decreases your chances for a home run.
How a Multi-Asset Income Fund Can Help You Reach Your Income Goals
The income fund model and growth fund model are two of the more popular forms of funds in the private equity world.
The operators of these funds make investment decisions with the focus on achieving the fund’s goals and avoid taking any extra risk than is necessary to achieve that goal.
An income fund usually will prefer to invest in deals that provide cash flow from very early on in the investment. This, in turn, gives them the ability to pass on that cash flow to you—the investor—fairly quickly. To illustrate, imagine that two great deals come into the pipeline of an operator of a growth and income fund. One deal comes with a considerable level of safety and steady returns that meet the fund’s objective, and another deal has higher return potential but a longer time frame to pay out. The operator can gear the income fund toward the safer deal, while allowing a growth fund to take on the latter deal. This way, they can meet the goals of both sets of investors.
Two Main Types of Multi-Asset Funds
While there are funds of funds that incorporate traditional assets like stocks and bonds into their respective funds, this article focuses on SIH Capital Group’s core competency, which is alternative assets—and real estate, in particular.
1) A fund of fund model
The fund manager typically does not operate the deals they invest in. The operator usually has an extensive background in the asset classes in which they specialize. For example, a fund manager in the apartment building space may have been an operator for many years. This expertise gives them an advantage in being able to identify other competent operators. While the fund manager relies on his network and experience to allocate investor money, this is a lot less time consuming than personally operating the individual assets.
2) Operators raising funds for their own deals
This increasingly popular approach is just like other syndications that we have discussed in previous articles, but with considerable added scale and flexibility for the operator.
The reasons for using this model vary. Sometimes, operators want to have ample capital on hand to seize another opportunity on the horizon or to smooth out some of the peaks and valleys in their capital-raising process. To be certain, there are times when operators get inundated with investor money, and other times when there are so many competing deals being presented simultaneously to the investor community that attracting funding becomes very difficult.
The Benefits of a Multi-Asset Income Fund
A multi-asset fund is typically a one-stop shop for diversification. Because it has more projects, a non-operating fund tends to be invested in deals with a more diverse geographic footprint and a more varied timeline, with different deals being invested in and sold at staggered times. This provides some margin of safety for investors in the event that the fund manager invested at the peak of the market.
The investor also experiences more predictable results because the law of averages will play a larger role in an investment of many vs. an investment of few. With that comes a certain level of reduced anxiety in terms of always looking for the next “great deal” to invest in.
Lastly, by diversifying into private investments that are not traded on the stock market, the investor can significantly reduce the overall volatility of their portfolio. Any reduction of volatility can go a long way in helping an investor stay emotionally even during a market downturn.
The Investor’s Goals Are More Important Than the Fund
You need to make sure that the fund you invest in meets the goals you have set. This might seem obvious, but an income-oriented investor should look for an income fund that places an emphasis on capital preservation. Even a blended strategy of growth and income might not be right for them. Alternatively, a growth investor in a well-paying job may choose only a growth fund because that’s what’s right for them. This is where educating yourself and talking to trusted professionals come in handy.
Once you and your financial professional identify a fund that meets your objectives, that’s when the hard work begins: due diligence.
Due Diligence for a Multi-Asset Fund
Your due diligence should include requesting the operator’s investor documents, which should detail the returns produced by their previous income funds. Word to the wise: Most operators with excellent track records will proudly promote them in these documents. While not a deal breaker, an omission of the track record should raise a red flag—and a refusal to provide the information indicates that it’s a good time to walk away from the deal.
Here’s a pro tip:
When looking at investor documents, determine whether the returns stated are projected or realized, and whether they are project-level or investor returns. Projected returns simply represent a forecast and should only be provided on brand new projects. If projected returns are given on seasoned deals, that’s worrisome. Ideally, you want to see realized returns that beat projected estimates. (That’s the definition of underpromise and overdeliver!) Project returns are also misleading because they don’t account for the profit splits with the fund manager. That’s why you want to focus on investor returns—this is the net amount that investors saw from investing in that deal.
A Note About Retirement
Investing for income can come with challenges. Yields are at historical lows and fixed income investors face a “bleak future,” according to Warren Buffet. Having the ability to invest for income can make a big difference in a person’s quality of life for retirement. In short, multi-asset income funds can be a powerful tool if you’re looking to grow your income while at the same time lower your portfolio’s overall volatility.
If you liked this article and wish to continue on your path in learning about alternative investments, please make sure to check out my other educational articles as well as my book, The Alternative Investment Almanac: Expert Insights on Building Personal Wealth in Non-Traditional Ways.
Disclaimer: The information presented in this article is for informational purposes only and does not constitute professional financial or investment advice. The author does not make any guarantees or promises as to the results that may be obtained from it. You should never make any investment decision without first consulting with your own financial advisor and conducting your own research and due diligence. Even though, the author has made reasonable efforts to ensure that the contents of this article were correct at press time. The author disclaims all liability in the event that any information, commentary, analysis, opinions, advice and/or recommendations contained in this article results in any investment or other losses. Your use of the information in this article is at your own risk.