FUND FLOWS: A smooth ride

Smooth rideMulti-asset funds have increased in popularity after delivering investment gains with reduced volatility, finds Catherine Lafferty.

In an uncertain world diversification and hedge betting have their attractions. Multi-asset funds, which can invest across a broad investment universe within stock and bonds, are designed to meet the needs of those investors who are wary of putting all their eggs in one basket.

Evolving from balanced funds, they can now include equities, bonds and cash and they sit between the two extremes offering lower risk than equity funds but more growth opportunities than bond funds.

It sounds simple, but mixed assets span a wide range of products, from conservative balanced products that follow strict allocation rules, to alternative asset allocation products with ‘go anywhere’ mandates, and some that invest in complex derivative products. 

Ben Seager-Scott, chief investment strategist at Tilney, cautions that—as in the case of single-strategy funds—not all multi-asset funds are equal.

He says: “A given fund could well have different strengths and weaknesses in different asset classes, so there are several factors that investors need to think about before investing.”

Despite the fact that mixed assets may have passive building blocks in their construction, they are active vehicles, and are a place where managers can still add active value with their tactical and strategic asset allocation decisions.

Multi asset fund managers typically have the flexibility to move between these asset classes according to market conditions, in theory moving into safer assets like bonds and cash in times of strife, and switching into stocks when the going is good.

Marius Bakker, investment strategist at asset manager Kempen, says: “As the economic cycle matures we expect to add to our allocation assets that perform well during a period of slowing growth and rising inflation, such as commodities and real estate. We remain cautious in terms of valuation and when rising equity prices are no longer supported by stronger corporate earnings and profitability we expect to reduce our exposure.” 

The aims of a multi asset fund will depend on the given fund but typically they aim to deliver investors with a reasonable rate of return and less volatility than the market at large.

Some multi-asset funds specifically target a decent level of income and were designed with people drawing-down their pensions in mind.

It is an approach that has proven to be a popular one, appealing to advisors and potentially appealing to cautious investors or those approaching retirement.

Laith Khalaf, senior analyst at Hargreaves Lansdown, says: “They have become increasingly popular, largely because there have been so many of these funds launched in recent years.

They also provide a neat solution for advisers because they take on a lot of the asset allocation duties, allowing advisers to focus more on financial planning.”

Yet Seager-Scott warns that despite their one-stop investment shop popularity, the main disadvantage of multi-asset funds is that the additional research required in combining several different asset classes in an effective manner usually means there is an additional layer of charges associated.

The additional charges have not deterred investors, as mixed assets have seen positive net flows in every month for a number of years.

Stephanie Clarke, senior vice president of global market intelligence, mutual fund and retirement solutions at fund data firm Broadridge, says that over the past decade, assets under management in the multi-asset sector have tripled.

The majority of the growth has come from net inflow, but investors have enjoyed a market return of around 3% per annum on average. 

Net inflows into the mixed asset funds in the past 12 months indicate an expansionary organic growth of 11%, twice the growth rate of the active fund market in total.

She says: “Investors are increasingly looking for a product that offers them a given solution or outcome. Mixed asset funds have names that offer investors assurance of these outcomes: stable returns, income, target returns, growth.”

Yet for all their promise of safety, predicting the performance of multi asset funds depends on the risk level that the fund is pitched at.

Equities have had a strong run of late and bonds have struggled against the prospect of rising interest rates, so any fund with a higher exposure to shares would have benefited from this trend.

Khalaf says: “Looking forward over 12 months is anyone’s guess but in the long term a decent multi-asset fund can be expected to deliver less than the stock market, but with a smoother ride along the way.”

Marius Bakker says Kempen’s current outlook is constructive for global growth. He expects interest rates gradually to increase and global equities to continue to perform well. Accordingly Kempen holds an underweight position in government bonds.

Equities are expected to keep performing well as the global upturn in the economic cycle supports revenue and profit growth.

Kempen holds a regional overweight in the eurozone as the firm sees more room for economic expansion in this area, in combination with more attractive valuation levels. 

Kempen has also increased its exposure to eurozone equities and emerging markets, as these are the regions with the best opportunities to benefit from higher global growth.

Bakker says: “European companies have lagged their US counterparts in terms of earnings growth for years and have more excess capacity. We expect this gap will partly close and have therefore lowered our exposure to US equities. Emerging markets are simultaneously benefitting from a rise in commodity prices and a lower dollar.” 

Cordula Bauss, portfolio manager in the multi asset active allocation strategies team at Allianz Global Investors, echoes the positivity about emerging market equity performance in the last 12 months.

She says that, given the relative attractiveness of equities, the weighting of this segment will increase in the near future. The fundamental backdrop remains supportive. Further out, Allianz’s asset allocation relies on a blend of technical and fundamental analysis. 

“In case of a rate rise in the UK the effects will be limited, especially as the relative high exposure to absolute return strategies stabilises the portfolio as well as the international focus in stock markets.”

©2017 funds europe