February 2014

MULTI-ASSET FUNDS: All-terrain vehicles

Tire tracksIs 2014 the year of the multi-asset fund? With uncertainty plaguing the markets, more investors are turning to fund managers for help with asset allocations – and with good reason. George Mitton reports. Whether they are diversified growth funds aimed at pension schemes or absolute return vehicles aimed at retail investors, multi-asset investing is on the rise. In the UK, multi-asset funds were the second best-selling fund category after equity funds last year, according to the Investment Management Association. In the third quarter of 2013, multi-asset was the only fund type in Europe for which launches outnumbered closures, according to data from Lipper.Even apparently straightforward products, such as equity funds, are increasingly incorporating multi-asset qualities, for instance investing in volatility to hedge exposures. As one observer puts it, “everything is becoming a bit of a blend”. Practitioners say the trend is good for the end investor. Russell Research, among others, has argued that investors should make more use of multi-asset solutions. With so much momentum behind this investment style, could 2014 be the year of the multi-asset fund? One reason that multi-asset funds are appealing is that the market is so difficult to predict right now. “It’s difficult for investors to come up with a good strategy because there’s so much uncertainty,” says Charles Janssen, head of multi-asset solutions at BNP Paribas Investment Partners. “What are yields going to do, will they rise? Equities are expensive, are they going to fall? I’m not saying people are giving up. But they are looking for more safety – having the mix of asset classes done by fund managers.” The prospect of delegating asset allocation to a fund manager is appealing both to retail investors and smaller institutions, for instance pension funds with less than €250 million in assets, which may lack the in-house staff capability of doing asset allocation themselves. But there are good reasons for more sophisticated institutional investors to take a multi-asset class approach, too. One is evidence that there are currently fewer opportunities than usual to generate outperformance by security selection alone. According to S&P Dow Jones Indices, last year, the average “dispersion” of stocks in the S&P 500 index – a measure of how differently individual assets perform compared with an index – was at its lowest level in the past 23 years. “By some measures, it was the toughest year for stock pickers in decades: rarely in history did the average stock deviate so little from its peers, or from the market,” says Timothy Edwards, director, investment strategy at S&P Dow Jones Indices. Last year was kind to US equities: the S&P 500 posted its biggest annual jump in 16 years. But this finding suggests it mattered relatively little which US equity manager you chose, because it was unusually difficult to generate above-benchmark returns. In such a market, investors could have spent their time more profitably on asset allocation than on comparing fund managers – a finding that supports the multi-asset approach. BE DYNAMIC
Another driver of multi-asset investing is growing acceptance that static asset allocations are a bad thing. Pensions consultant Towers Watson, among others, has argued that dynamic asset allocation can aid defined benefit pension schemes. Retail investors are also coming to realise the benefits of having their asset allocation tactically managed by a professional. Although everyone knows not to put their eggs in one basket, many investors aren’t good at rapidly adapting their asset mix in response to market conditions. “Everybody is spreading their eggs, but spreading your eggs requires some skill,” says Florence Barjou, deputy head of multi-asset investments, Lyxor. “You need to be efficient in terms of portfolio construction. You sometimes need a high dose of flexibility. Not all investors are able to do this, they need to delegate.” The importance of adapting asset allocations to market conditions was underlined in May last year when the US Federal Reserve caused asset prices to diverge sharply by hinting it would begin tapering its quantitative easing programme. Investors who did not adapt their asset allocation in light of Ben Bernanke’s comments were at a disadvantage. Another trigger for the support of multi-asset investing is the increasing number of tools at the disposal of both investors and fund managers to analyse multi-asset portfolios. Technology providers are offering a new breed of tools built from a cross-asset class perspective. This is a change from the past, when their offerings would often be a hodgepodge of indices tacked on to one another, which lacked a holistic feel. “Historically, people would say, let’s just get a global index for the equities and a global index for fixed income, and glue them together, and we’ve got our multi-asset class strategy,” says Ian Webster, managing director, Europe, Axioma. “But your ability to look at asset classes and correlations between them are lost in that world.” Axioma, among other technology companies, has attempted to build a platform, “from the ground up with a multi-asset class view of the world”, in order to help fund managers and investors manage multi-asset portfolios. CHEQUERED PAST
The current popularity of multi-asset funds has not happened overnight, however. These funds have developed over at least a decade; one convenient marker for the beginning of the modern trend of multi-asset funds was the dotcom crash of 2000. “In the wake of the dotcom crisis, active asset allocation got a bit of a bad name,” says Toby Nangle, head of multi-asset, Threadneedle. “Multi-asset was a synonym for balanced and lots of active managers were not very active. Typically, balanced funds underperformed on the way up or on the down.” Nangle credits the dotcom crisis with forcing asset managers to become more active in the way they managed multi-asset portfolios. Fund managers began to spread their portfolios across more asset classes than the equity and bond components of a standard balanced fund. They became more tactical with the way they switched between asset classes, and gave themselves licence to completely remove exposure to asset classes if they didn’t like them. These kinds of funds got their trial by strength in the 2008 global financial crisis, when “the experience typically was much better than it was on a passive strategic asset allocation”, says Nangle. It seems multi-asset funds have attracted plenty of money. As of June 2013, there was about $2.4 trillion (€1.8 trillion) invested in these funds, equal to almost 15% of all fund assets, according to data from Lipper. However, there is a question that has not yet been answered in this article. It is assumed that fund managers are better at making asset allocation decision than investors. But is this true? How can fund managers promise to deliver good returns on such complex portfolios potentially spread across countless global markets? “The key is to have people with macro experience,” says Georgina Taylor, product director, multi-asset team at Invesco Perpetual. “It’s not a one-man job. We have three fund managers running our fund. You need people who are coming at this in different ways.” Multi-asset fund managers insist they can make money thanks to clever tactical calls that investors themselves might fail to make. However, they concede that to do so their staff must take a top-down view, looking at the macro economy and not, for instance, picking through the financial reports of individual companies. The job requires a “big picture” view because the opportunity set is simply too large to allow managers to be expert at every security their fund might invest in. However, many multi-asset managers insist their job is not so different from managing a more specific type of fund. “The biggest driver of performance is the success ratio,” says Matteo Germano, global head of multi-asset investments at Pioneer Investments. “Not only having good ideas, but to be strong in letting the win run and cutting your losers early. Recognising when you’re wrong and, when you’re right, understand your investment case is strong.” LOOKING AHEAD
Current trends suggest multi-asset funds will continue to gain assets. According to Lipper, the sum held in “asset allocation” funds, a group that includes target-date, target-risk and other types of multi-asset funds, grew 141% from the end of 2008 to the end of June last year. Several trends could support further inflows into these products. The shift to passive management, for instance, in which investors turn to low-cost, index-linked products such as exchange-traded funds, supports the multi-asset approach, because it encourages investors to think more about their allocation between asset classes than fund manager selection. The shift from defined benefit to defined contribution pension schemes might also support the growth of multi-asset funds, since many defined contribution schemes take as their default investment option some kind of multi-asset vehicle. Finally, Gina Wilton, investment specialist, multi-asset solutions BNP Paribas Investment Partners, says new laws such as the Retail Distribution Review in the UK, and similar legislation in Europe, will encourage more financial advisers to recommend multi-asset funds to their clients, since the laws require advisers to demonstrate they are providing a good service to their clients, and these products are a convenient and relatively cheap way to achieve portfolio diversification. It seems multi-asset funds can expect good inflows in future as investors come to appreciate the advantages of blending their investments. ©2014 funds europe

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