How flexible is flexible?

Andrew Harman explores the pitfalls to avoid in order to stay true to your investment process.

Staying true to your investment process: how flexible is flexible?

One of the key advantages of a multi-asset or diversified growth fund is that it has the potential to perform in all weather. Investors are, to some extent, more insulated from the highs and lows of individual asset markets, and can therefore achieve their financial outcomes with greater consistency and predictability.

However, in order for this to be a reality, flexible multi-asset funds really have to be flexible.
This has come into the spotlight because a number of multi‑asset and diversified growth funds have not performed as they said they would. They have proved neither as active, flexible or consistent as they claimed. It is clear from their positioning that when they say they are ‘go anywhere’, they are instead managed to relatively tight parameters.

To our mind, multi-asset doesn’t mean having a little bit more in bonds, or a little bit less in equities. If there is no value in government bonds, for example, they shouldn’t form part of a multi-asset portfolio. At the same time, if there is a compelling opportunity, an investor should be free to back it with conviction, rather than doing so half-heartedly because of a necessity to hold a certain percentage in another (less attractive) asset class. Flexibility needs to mean flexibility.

In achieving this, starting with a blank sheet of paper rather than a pre-populated asset allocation template is important in creating consistent long-term returns. Assets may display quite different risk characteristics over the course of a market cycle. As such, to say that an investment will always have 55-65% equities and 35-45% bonds is to ignore changing market and economic conditions. It suggests, erroneously, that an investment’s risk characteristics and correlation are static.

Behavioural biases

There are other problems with a static asset allocation. It can encourage behavioural biases. It can mean that a fund manager keeps adding to a weakening asset class as they rebalance a portfolio to meet their allocation model. As we see it, the appeal of individual investment types varies over time as valuations change and according to prevailing market, economic and political conditions. An asset class may be appropriate to meet an investor’s objectives at one point in the cycle, but will not serve the same purpose once the price has risen. 

Achieving real diversity takes a more nuanced approach. There is an argument that investors can allocate within the equity market and achieve sufficient diversity. We would take issue with that premise. Yes, cyclical companies will behave differently to defensive companies. However, it is all equity risk and it doesn’t provide a lot of real diversification. When markets fall, both types will fall and the fact that one type of company falls less than another is irrelevant for an investors that needs to achieve CPI + 4% to achieve their goals. 

Nowhere is this misperception of risk more acute than in the fixed income market. Investors tend to think of fixed income as very defensive because that has been the case historically. However, today, parts of the fixed income market have a zero return and don’t seem very defensive at all, particularly in a climate of rising inflation. Instead, by dynamically shifting exposures, it is possible to take advantage of investment opportunities as and when they arise.

Flexibility/matching with objectives

As we see it, each investment must be in the portfolio on its own merits. The only investments that need to be there are those where we are sufficiently compensated for taking investment risk and increase our chance of achieving our investors’ objectives. You need to understand that objective and have the tools to do it. We have a team-based approach. This means more pairs of eyes and that has a real benefit for our clients. At the same time, disciplined active management steers us away from behavioural biases.


Transparency is also important for multi-asset funds of all kinds. Investors should be able to interrogate their investment manager on how they have generated their returns, what worked and didn’t work, and how their allocation has changed over time. Only then can they see if a fund manager is truly ‘walking the walking’ on flexible asset allocation.

It is important for advisers’ relationship with their clients – if something goes wrong (or right), they can explain it. They can be reassured that the fund manager is sticking to the process and it is easy to maintain a good relationship. We know every asset allocation decisions we’ve made since the start of the fund almost three years ago and share this with our clients through a web based tool. This is proper transparency and gives real insight into how the fund is run and whether it is true to its investment process.

Issued by First State

Risk factors

This document is a financial promotion for The First State Multi-Asset Strategy. This information is for professional clients only in the EEA and elsewhere where lawful. Investing involves certain risks including:

  • The value of investments and any income from them may go down as well as up and are not guaranteed. Investors may get back significantly less than the original amount invested
  • Currency risk: Changes in exchange rates will affect the value of assets which are denominated in other currencies
  • Inflation risk: if the returns on the investment have not beaten the rate of inflation, you will have less buying power in the future
  • Objective risk: there is no guarantee that the Fund will meet its investment objective and no form of capital protection will apply

For a full description of the terms of investment and the risks please see the Prospectus and Key Investor Information Document for each Fund.

If you are in any doubt as to the suitability of our funds for your investment needs, please seek investment advice.

For further institutional enquiries contact

For wholesale enquiries contact

Important Information

This document has been prepared for informational purposes only and is only intended to provide a summary of the subject matter covered and does not purport to be comprehensive. The views expressed are the views of the writer at the time of issue and may change over time. It does not constitute investment advice and/or a recommendation and should not be used as the basis of any investment decision. This document is not an offer document and does not constitute an offer or invitation or investment recommendation to distribute or purchase securities, shares, units or other interests or to enter into an investment agreement. No person should rely on the content and/or act on the basis of any material contained in this document.

This document is confidential and must not be copied, reproduced, circulated or transmitted, in whole or in part, and in any form or by any means without our prior written consent. The information contained within this document has been obtained from sources that we believe to be reliable and accurate at the time of issue but no representation or warranty, express or implied, is made as to the fairness, accuracy, or completeness of the information. We do not accept any liability whatsoever for any loss arising directly or indirectly from any use of this information.

References to “we” or “us” are references to First State Investments.

In the UK, issued by First State Investments (UK) Limited which is authorised and regulated by the Financial Conduct Authority (registration number 143359). Registered office Finsbury Circus House, 15 Finsbury Circus, London, EC2M 7EB number 2294743. Outside the UK within the EEA, this document is issued by First State Investments International Limited which is authorised and regulated in the UK by the Financial Conduct Authority (registered number 122512). Registered office: 23 St. Andrew Square, Edinburgh, EH2 1BB number SCO79063.

Certain funds referred to in this document are identified as sub-funds of First State Investments ICVC, an open ended investment company registered in England and Wales (“OEIC”). Further information is contained in the Prospectus and Key Investor Information Documents of the OEIC which are available free of charge by writing to: Client Services, First State Investments (UK) Limited, Finsbury Circus House, Finsbury Circus, London, EC2M 7EB or by telephoning 0800 587 4141 between 9am and 5pm Monday to Friday or by visiting Telephone calls may be recorded.
The distribution or purchase of shares in the funds, or entering into an investment agreement with First State Investments may be restricted in certain jurisdictions.

Representative and Paying Agent in Switzerland: The representative and paying agent in Switzerland is BNP Paribas Securities Services, Paris, succursale de Zurich, Selnaustrasse 16, 8002 Zurich, Switzerland. Place where the relevant documentation may be obtained: The prospectus, key investor information documents (KIIDs), the instrument of incorporation as well as the annual and semi-annual reports may be obtained free of charge from the representative in Switzerland.

First State Investments (UK) Limited and First State Investments International Limited are part of Colonial First State Asset Management (“CFSGAM”) which is the consolidated asset management division of the Commonwealth Bank of Australia ABN 48 123 123 124. CFSGAM includes a number of entities in different jurisdictions, operating in Australia as CFSGAM and as First State Investments elsewhere. The Commonwealth Bank of Australia (“Bank”) and its subsidiaries do not guarantee the performance of any investment or entity referred to in this document or the repayment of capital. Any investments referred to are not deposits or other liabilities of the Bank or its subsidiaries, and are subject to investment risk including loss of income and capital