The Strategic Advantage of Auto-Rebalancing Globally Diversified Retail Passive Multi-Asset Funds

In the realm of financial planning and investment management, the Academy of Life Planning champions a visionary approach that prioritises sustainability, accessibility, and integrity. A pivotal element of our investment philosophy is the recommendation of auto-rebalancing globally diversified retail passive multi-asset funds as the default investment solution for our clients. This strategy is deeply rooted in our understanding that the most significant variance in lifetime cash flow forecasts for our clients stems not from the transient performance of funds but from the magnitude and duration of sustainable livelihoods generated through identifying productive assets and leveraging entrepreneurial opportunities.

Understanding the Core of Investment Strategy

The year 2023 served as a profound case study, illustrating the limitations of active fund management. Despite the allure of outperforming the market, the reality, as reported by LSEG Lipper, highlighted a pervasive underperformance of actively managed funds and ETFs against their benchmarks. This was attributed to a concentration of market performance within a handful of stocks, underscoring the challenges active managers face in consistently beating the market.

In light of this, our investment philosophy is anchored in the principle that no market participant can consistently predict and outperform market movements over the long term. This understanding is further compounded by the additional costs associated with active management, which can significantly erode returns over time.

The Rationale for Passive Multi-Asset Funds

Our default investment solution is designed around several key tenets that align with the long-term financial well-being and ‘Kokoro’ of our clients. These include:

1. Global Diversification: By spreading investments across a wide range of asset classes and geographical regions, our clients are better shielded from the volatility of specific markets, thereby reducing risk and enhancing the stability of returns over time.
2. Auto-Rebalancing: This feature ensures that the portfolio maintains its intended asset allocation over time, automatically adjusting in response to market movements. This disciplined approach negates the emotional biases that often lead to suboptimal investment decisions.
3. Cost Efficiency: Passive multi-asset funds typically have lower expense ratios compared to their actively managed counterparts. This cost-effectiveness is crucial in maximising returns for our clients, given the compounding effect of fees on investment growth over time.
4. Focus on Sustainable Livelihoods: By advocating for investments in passive funds, we encourage our clients to focus on generating sustainable livelihoods through identifying productive assets and entrepreneurial opportunities. This approach aligns with our ethos of crafting a legacy that transcends financial success, embedding social, environmental, and spiritual well-being.

Addressing the Misconception of Active Management

While some investors may be drawn to the prospect of selecting active managers in the hopes of achieving superior returns, the evidence consistently suggests a different reality. The performance of active funds, especially in the face of geopolitical tensions, economic uncertainties, and the dominance of a few large-cap stocks, has shown that the pursuit of market-beating returns is fraught with challenges.

Christopher Woolard, the former CEO of the FCA, aptly noted the commoditisation of the retail investment market, pointing out that most retail investors are best served by straightforward, well-diversified, and cost-effective investment solutions. This insight is particularly relevant in an era where the allure of complex, high-cost strategies often detracts from the fundamental principles of sound investment management.

Conclusion

In conclusion, the Academy of Life Planning remains steadfast in our commitment to revolutionising financial planning through transparent, ethical, and accessible strategies. Our advocacy for auto-rebalancing globally diversified retail passive multi-asset funds as the default investment solution is a testament to our belief in empowering clients to build sustainable livelihoods, grounded in the principles of diversification, cost efficiency, and long-term financial stability. As we navigate the evolving landscape of investment management, our focus remains on guiding our clients towards realising their ‘Kokoro’—a life of financial security enriched with emotional, intellectual, and spiritual abundance.

Questions & Answers

Q1: What is a globally diversified retail passive multi-asset fund?

A1: A globally diversified retail passive multi-asset fund is an investment vehicle that pools money from multiple investors to purchase a wide range of assets across different geographic regions and asset classes, such as stocks, bonds, and real estate. It operates on a passive management strategy, aiming to replicate the performance of a specific benchmark rather than outperforming the market, thus minimising active management fees.

Q2: Why does the Academy of Life Planning recommend auto-rebalancing for these funds?

A2: The Academy of Life Planning recommends auto-rebalancing because it ensures the fund’s asset allocation remains aligned with the investor’s risk tolerance and investment goals over time. Market movements can cause certain assets to deviate from their target allocation, and auto-rebalancing adjusts the portfolio back to its original asset mix, mitigating risk and capitalising on the principle of buying low and selling high.

Q3: How does geographical diversification in a multi-asset fund benefit investors?

A3: Geographical diversification spreads investments across multiple regions, reducing the risk tied to the economic, political, or social instability of any single country or region. It enables investors to benefit from global growth opportunities, buffering against localised downturns and enhancing the potential for more stable and consistent returns over time.

Q4: Can active fund management strategies outperform passive multi-asset funds?

A4: While some active fund managers may outperform the market in the short term, the evidence suggests that consistently beating the market over the long term is challenging due to market unpredictability and the higher fees associated with active management. Passive multi-asset funds offer a cost-effective, lower-risk approach that is more likely to meet investor goals over the long term.

Q5: Why is the focus on sustainable livelihoods and entrepreneurial opportunities important in financial planning?

A5: Focusing on sustainable livelihoods and leveraging entrepreneurial opportunities is crucial because it extends beyond mere financial returns. It encompasses generating a meaningful impact through investments that support social, environmental, and economic well-being. This approach aligns with the Academy’s ethos of creating a sustainable legacy, promoting not just financial security but also contributing to a better world.

Q6: Are there any downsides to investing in passive multi-asset funds?

A6: Like all investments, passive multi-asset funds carry certain risks, including market risk, where the entire market could decline, impacting the fund’s value. However, due to their diversified nature and lower costs, these risks are often mitigated compared to other investment strategies. Investors should consider their personal risk tolerance and investment horizon before investing.

Q7: How do auto-rebalancing passive funds address the issue of high fees found in active management?

A7: Auto-rebalancing passive funds inherently have lower expense ratios as they require less active management. This cost efficiency is one of their key advantages, allowing investors to retain a greater portion of their returns over time. By eliminating the need for frequent, manual rebalancing, these funds further reduce costs and complexity for investors.

These Q&As aim to clarify the advantages and considerations of auto-rebalancing globally diversified retail passive multi-asset funds, aligning with the Academy’s mission of providing transparent, ethical, and accessible financial planning solutions.