All-in-one funds are getting creative to maintain diversification

Diversification is one of the cornerstones of investing and multi-asset funds, sometimes called ‘all-in-one' or ‘one-stop-shop' funds, are one of the simplest ways to gain exposure to a broad spread of investments.

But amid a few years of testing market environments, multi-asset fund managers have been expanding their investment horizons to maintain that true level of diversification and achieve their dual aims of delivering growth and returns alongside some wealth preservation.

What was the traditional approach and why has it been questioned?

These funds invest in a range of assets. Traditionally this meant equities and bonds split on a 60/40 ratio, respectively.

AJ Bell offers a range of its own ready to go multi-asset funds, and Ryan Hughes, Managing Director of AJ Bell Investments, says that the one of the main things to decide from the off is what level of risk you’re comfortable holding as this will determine where you fall on the equity/bond split.

“A well-diversified portfolio won’t do you much good if you’re constantly pulling money out of the market after a downturn. Creating an investment ride that you’re able to stay on without losing sleep at night is the top priority,” he says.

This ‘classic’ 60/40 set up has been challenged in recent years, most recently in 2022 when inflation and interest rates rose, causing bonds and equities to sell off in tandem.

It was one of the heaviest periods of losses in markets since the 2007/8 financial crisis, with global stocks and bonds losing more than $30 trillion in value across the course of the year.

The fact bonds fell even more heavily than stocks, saw many dub the event the ‘death of the 60/40’ model, increasing the prominence of an alternative 60-20-20 split, with the non-equity portion divided between bonds and ‘alternatives’. This included assets such as gold and cash, but also areas like property.

The Vanguard LifeStrategy range is one of the most well-known multi-asset strategies and a spokesperson said that while the 2022 period was “painful” it wasn’t a totally unprecedented event, as bonds and equities have fallen in combination before.

What has changed?

Research by AJ Bell into the make-up of the average make up of multi-asset funds found that there has been a noticeable shift in the average allocation of these funds over the past three years.

Looking across the IA’s multi-asset sectors (Mixed Investment 0-35%, 20-60% and 40-85%) there was a throughline of not just the overall equity and bond allocations shifting but within each asset class a broadening out of the types of stocks and bonds being held to try and maintain the desired diversification.

To break this down, the AJ Bell study focused on the 20-60% sector as this represents the most ‘balanced’ of the three.

Since 2023, the average ‘balanced’ multi-asset fund has reduced its UK equity weighting from 9.91% to 7.82%, a 21% change on a proportional basis.

Balanced funds had a near 25% percentage change in both their North American and European equity allocations, respectively.

The ‘alternatives’ bucket has also become a bigger part of the mix, going from 1.46% on average to 2.44%. While those headline numbers feel marginal, as a proportional shift this was a 67% jump in three years.

For the fixed income bucket, this has gone from 34.82% to 35.9%, indicating that fund managers were maintaining their historic equity-bond splits.

However drilling into the specific assets; government bonds now make up a much bigger part of this defensive bucket, with a 104.9% change in terms of the proportion held by funds in this sector. In 2023, the average fund had just under 5% in government bonds, but in 2026 it’s up to 11.5%.

How do AJ Bell funds approach diversification?

James Flintoft, Head of Investment Solutions at AJ Bell, says: “Spreading risk across different investments is one of the most important things we do when managing the AJ Bell funds. But what ‘good diversification’ looks like changes over time — and our approach has evolved since 2023.”

Prior to 2023, AJ Bell held targeted positions in specific parts of the US stock market, as standalone building blocks in the funds but that year they simplifed their approach and removed these sector-level positions, redirecting that money into broader regional markets, particularly Emerging Markets and Asia Pacific, in order to maintain diversification without sacrificing total return prospects.

That refinement continued into this year, especially around the funds’ regional frameworks, trimming some alternatives exposure in UK property companies, after concluding they weren't adding enough diversification benefit.

On the fixed income front, Flintoft says that they paid extra attention to their bonds exposure to make sure that it was well diversified, in line with the sector wide trends identified in the study above.

This had a “particular focus on how exposed the funds are to the UK bond market, instead allocating more globally”, Flintoft says.

“This has been beneficial throughout the recent market volatility, as the UK is particularly exposed to rising energy prices,” he adds.

The bond portion of the funds have been selected to provide protection from inflation risk via TIPS (Treasury Inflation Protected Securities) in the UK, and US shorter dated bonds.

Like AJ Bell, Vanguard regularly reviews the asset allocation and underlying exposures of the LifeStrategy funds, but always with a strategic perspective.

On the inflation protection side, Vanguard’s say that while there was a widespread call to replace bonds with alternatives completely, this could introduce higher costs, complexity, and illiquidity, without guaranteeing better outcomes and it still sees a lot of value in the classic 60/40 model.

AJ Bell customers can do a quick of their entire portfolio diversification themselves using the X-ray tool to get a breakdown of exposure across all the investments held in that account, allowing you to see in which areas you have more, or less, exposure than you’d like.