MULTI-ASSET ROUNDTABLE: A very broad church

Our panel tackles questions around appropriate benchmarks for multi-asset funds, and where these products sit in portfolios. First, though, what exactly is a multi-asset fund? It’s a very broad church, we are told.

JB Beckett (UK director, APFI)
Oliver Blin (head of cross asset systematic strategies, Unigestion)
Katherine Lynas (head of manager research, Punter Southall)
Simon Fox (senior investment specialist, Aberdeen Standard)
Philip Saunders (co-head, multi asset, Investec)

Funds Europe – A range of funds occupies the multi-asset space, from traditional balanced products, to funds also investing in non-traditional asset classes like commodities. What is a truly multi-asset fund?

JB Beckett, Association of Professional Fund Investors – In the absence of something better I think the term ‘multi-asset’ describes a fund, or indeed a solution, that’s designed to take a diversified approach to different asset classes. Factually I think it is correct, and I think we are in danger sometimes of trying to narrow it down into distinct sub-categories. That can only confuse investors rather than help them and as an industry, confusing investors seems to be our best skill.

One danger is we are at risk of is inconsistency. We keep wanting to reinvent ourselves. I think the ‘solutions’ point is actually quite well made. So leave the term multi-asset as it is. It’s a broad church.

Oliver Blin, Unigestion – I agree that ‘multi-asset’ is factually correct. It would be really hard to take another position. Where I might differ slightly is the fact that ‘multi-asset’ just describes opportunities and says nothing about the outcome that you are trying to generate. The end to us should be with the end investor. Why would you invest in multi-asset portfolios? It’s because you want something smoother than just investing in, say, equities. You want to have something more diversified, to get that additional benefit of maybe having less drawdowns when things go bad, particularly for risk assets.

Katherine Lynas, Punter Southall – I think multi-asset describes the opportunity set. There are so many different ways of delivering the structure and the investment: whether it’s dynamic asset allocation, fixed asset allocation, or whether it’s not very dynamic but every now and again the fund manager has a look at the asset allocation.

There are so many different ways of approaching asset allocation and dealing with risk measurement and how that’s embedded into the investment strategy. Fund managers will come up with lots of different labels for products, but they don’t necessarily describe what we, as investors, would label the funds and therefore this confusion just perpetuates. As a broad name for what the asset class is doing, it works. It is for the rest of us, as investment advisors, to come up with frameworks and structures to describe the individual sleeves.

Simon Fox, Aberdeen Standard – Multi-asset is multi-asset. That said, I think there has been a change over time which is important to consider. Five to ten years ago, multi-asset was very much more traditional in terms of the types of fund structures. It was much more fixed weight, less dynamic, more static in its asset allocation, and typically dependent on traditional equities and bonds.

The change that we have seen within the multi-asset universe is a shift towards more outcome-oriented strategies—strategies that are more aligned with the end investor’s objective. There is a distinct difference between a benchmark relative 60:40-type of portfolio, and one that is genuinely trying to deliver something that’s more consistent and less market dependent in terms of return outcomes. But there is clearly a huge array of approaches between both those end points, and trying to narrow down and bucket between them is difficult. We all come up with slightly different classifications, different ways to describe how you do that. I think that is important, but at a high level they are all multi-asset funds and can be suitable for lots of different investors in different contexts.

Philip Saunders, Investec – Multi-asset is fine as an umbrella term. Underneath the umbrella are two groups of products: the more traditional benchmark-oriented strategies, and outcome-oriented strategies. Amongst the former, apart from differing risk levels and regional orientations, the divide is between strategic and active approaches at the asset-allocation level.

We have to treat traditional balanced as a peer-relative version of the strategic category. In the outcome-oriented arena there is a high degree of apparent commonality in terms of risk and return objectives, but in reality the universe is much more diverse. More generic categories are beginning to emerge – the ‘absolute return’ strategies cluster at one end of the spectrum, and the more beta-centric strategies at the other. But it would be helpful for investors to have clearer sub-categorisation here.

Funds Europe – What are the key costs for providers of multi-asset funds and what should investors expect to pay? Is price competition yet a factor of this market?

Lynas – Every time we sit down with an asset manager to put a fund on a buy list we will try and negotiate costs. Sometimes we’re successful; sometimes we’re not. As yet, there isn’t the squeeze on the asset managers who have successful products, because they have proved that they can deliver the outcomes. Until we start to see the big houses and the successful funds failing to deliver, I can’t see that downward pressure on price coming from an institutional point of view.

Blin – It also depends on the markets being considered. I think in the UK it’s pretty advanced. There have been some great stories for some of the bigger names offering diversified growth funds (DGFs) that have performed quite well, and investors are ready to pay for this added value.

In Switzerland, and more generally in continental Europe, there is a big pressure on fees, and sometimes 51% of the decisions will be taken on this bottom line. Whether it’s a good or bad thing is not necessarily for me to say because I will be biased working for an active manager. But at some point you get what you pay for. If you are happy with a passive 60:40 portfolio, you don’t need to pay more than 20 basis points, and even that is expensive in some respects.

Fox – The market does feel competitive to us, particularly in the UK. All the searches that we are involved in are either through public tender or through searches with a consultant or an adviser.

There is a huge universe of managers out there who are all competing for the same mandates and for the same opportunities.

There is competition in terms of trying to win those mandates and take on clients. We report performance net of fees, we judge ourselves on that, and we are thinking about fees in everything that we do.

I suspect that most consultants are also judging us and our competitors on that net-of-fees basis. It’s an important part of the decision-making process and that is not necessarily the case in other asset classes where fees can often be a second-order consideration.

JB – You don’t need me to sit here and say that the multi-asset space is not a competitive environment; it’s not. The Financial Conduct Authority (FCA) has said as much in their recent Asset Management Study. They also indicated that certain multi-asset funds were not delivering, that they were overcharging, and that perhaps those involved in the selection of these funds hadn’t considered price nearly enough.

What I know is that, having probably seen most of the offerings in the market, many providers do believe they can charge me a premium. They’re sorely mistaken, they can’t. That for me is a real problem.

Saunders – In general, fees in the multi-asset space are reasonable in the case of the best-practice offerings. The level of value-add has to be high. In my view the quality of alpha generation and the level of sophistication in portfolio construction across the asset class waterfront requires well-resourced specialist teams. Consistently high quality asset allocation skills are a very scarce resource. If one was to unpack the active specialist skill sets at asset class sub-portfolio level and charge typical specialist asset class fees, this would become readily apparent.

Funds Europe – How do professional investors set about selecting a multi-asset fund as one component of a broader fund management roster? What are the key considerations?

Lynas – We’re looking for longevity in the solution, strength within the team and within the process. Working primarily with defined benefit pension schemes, what we’re asking is: what’s the role of the fund within the asset allocation of the overall pension scheme? We have our framework where we classify DGFs. We classify DGFs by reviewing their usage of risk. We consider whether it’s a stable risk budget and whether it’s more dynamic in use of risk, and therefore that’s going to change the path of the performance that’s delivered. We also look for diversification between two different or three different DGFs.

Fox – We talked about classification at the start, and we all agreed multi-asset was fine at the headline level, but in the UK the term ‘diversified growth fund’ has become extremely popular within the pensions industry. It’s not necessarily transferred through to the retail space, but within pension schemes and other larger investors, diversified growth funds as a concept has been the hot topic for a number of years. The way that we think about diversified growth funds, is that essentially they are designed to be more outcome-orientated, a cash-plus type of objective, maybe a consistent level of income, in some cases it’s an RPI-plus type of objective, but it’s meant to be something that’s delivering more consistent, more repeatable performance, more aligned with the end investor’s goal.

There is a distinct difference between funds in the DGF world, versus the more traditional multi-asset fund. The more traditional fund is benchmark-relative, tries to outperform market indices a little bit and add a little bit of alpha relative to a benchmark classification. For a lot of investors, particularly in the pension scheme space, their starting point is a portfolio that already includes equities and bonds and they’re looking for something that’s different. They’re nervous about the world ahead and the challenges facing traditional asset classes, so they’re trying to find something that gives them more reliability and more consistency of performance.

Blin – As a multi-asset portfolio manager and especially because I was working in continental Europe before, it was a great challenge marketing your product to investors, especially to larger pension funds because they would say, ‘Okay, I‘ve already got my bonds and equities. Why do I need someone else investing in bonds and equities and doing the same job that I’m doing?’

This means you have to prove that you can add value and do something different. A key consideration for investors should be whether a multi-asset portfolio manager can add something else to an existing strategic, equities, bonds and commodities allocation.

JB – I suppose the question also asks us how do we go about selecting these funds? For me DGFs used to be just a term for one or two funds that were in the multi-asset universe. It is the term I least like in the multi-asset space for a simple reason: because we say ‘diversified growth fund’ as if it‘s a given, as if it‘s an assumption that that’s going to give you diversified growth. There’s no way of knowing if it’s going to provide a diversified growth within the next phase of the market cycle. So it’s become a bit of a marketing term and I‘m not a big fan of it.

Saunders – Correctly categorising the multi-asset universe is key, particularly amongst the outcome-oriented funds where diversified growth is a spurious generic term. For example, the purer alpha absolute return strategies have been particularly popular, unsurprisingly after the experience of 2008. But just how challenging it is to consistently meet demanding return targets with very constrained risk budgets is  gradually becoming apparent.

The best starting point is to define ‘best practice’ in terms of the conceptual approach, processes, team size and depth, and portfolio construction ability.

Funds Europe – Given that each investor’s risk profile will differ, how can one multi-asset collective investment fund cater for a wide range of underlying investors?

Lynas – It is about the blending of different styles, objectives and funds in order to try and match the end investor’s requirement. I think it’s really useful because – certainly in the DGF universe – the minimum investment amounts are low and therefore you can do that for small and big investors alike.

Fox – If you’re looking at retail investors and you’re thinking about the life cycle of their investments, you might for example do things slightly differently for someone that’s looking for something more conservative or for someone that is in retirement looking for income. In the main, however, they’re all going to be derivations of that sort of core portfolio that sits in the DGF space.

JB – One of the biggest mistakes the asset management industry makes is that they overthink it. They overthink trying to position a multi-asset strategy, trying to do the final minutiae of detail for a particular investor group, and this is your risk profile and positioning, and this has created an off-the-shelf mentality. I think this is misdirected. Multi-asset managers would be far better thinking about what gives them the optimal risk-return within the risk budget that they set, communicate that information as transparently as possible to end investors, and then let the end-investor or adviser decide if that then meets their utility. Asset managers trying to almost lead the witness is not the right way to do this. Everyone I meet says they do it a little bit different to everybody else, but they really don’t. It may sound like they do, but trust me, they don’t.

Blin – As a portfolio manager, if you have a portfolio that can deliver let’s just say cash or inflation plus 5% per year or whatever the sweet-spot may be, if you can deliver that consistently for a prolonged period of time people are going to like your product. Then, if you have perhaps two funds delivering cash plus 5% but one has gone through a minus 10% drawdown and the other one has been a bit more consistent, obviously the more consistent one is going to be more attractive.

Saunders – Consistency is a wonderful and desirable thing. The problem is that opportunities to generate returns in markets are inherently lumpy. You have opportunity-rich and opportunity-poor environments and the problem is that smoothing returns excessively often involves too much of a return sacrifice. It is about striking the right balance.

Investor needs are probably more generic than we often suppose.

Funds Europe – What are the most typical benchmarks for multi-asset funds and why are they appropriate?

Lynas – We only consider multi-asset funds which have a cash or inflation-based benchmark. We wouldn’t look at a fund which has a market-based benchmark because it restricts the universe the manager will use to deliver consistent returns. We want to give the manager as much freedom to use as many tools and opportunities as possible to deliver performance.

Blin – I agree because if you tie yourself to a benchmark then for whatever reason in some year when the benchmark is down 15%, the multi-asset manager who achieves -12 will tell you, ‘I’m great, I’m  up from the benchmark by 3%.’ But I’m sorry, it’s not the goal of the multi-asset manager to deliver -12 on any given year.

Having absolute return targets – and obviously there are going to be years of drawdown and even slightly large drawdowns—asset managers should have the leeway to deliver absolute returns rather than being tied to a benchmark, so even if they say they are free to stray away from the benchmark, there is always a tendency to restrict the tracking you will take around a benchmark. Setting an absolute return target is going to be better for everyone in the end.

Fox – In practice you can really only manage against either a market-cap benchmark or a cash benchmark. I think it’s really difficult to do both at the same time, so a manager has to be one or the other.

We have lots of our assets in market relative portfolios, which in reality is where multi-asset investing emerged from historically. But I think the clear trend and clear demand from clients has been for us to manage against more outcome-oriented approaches, a cash-plus type of exposure.

In practice investor liabilities are not going up and down with a 60:40 portfolio, they’re not going up or down with the equity markets, they still need to save their money and generate returns in a consistent fashion, and they want us to be aligned to them, not to be able to say we’ve done well because we’ve outperformed a benchmark that’s down. That’s not what we are trying to deliver. So I would say cash-plus is the right way of doing it.

Saunders – We strongly favour inflation-related benchmarks for multi-asset growth funds because ultimately it is capital preservation in real terms that is the real rate of return that matters, and we believe in having an average risk target over a stated time horizon. In an income context, variable but sustainable income targets would seem to be more credible.

JB – Benchmarks are a bit of a moot point for me, having sat on both sides of the table, designing and launching products as well as buying them.

My experience is that fund managers are pretty remote to their quoted benchmark. It’s something fairly intangible and I don’t believe it’s something they necessarily key into on a day-to-day basis. The FCA itself has come out and criticised absolute return funds for just quoting cash. ‘Wow, we beat cash, fantastic! Great effort! You go home, you get yourself a bonus now’.

Funds Europe – How is this industry likely to evolve over the next few years and what are the main drivers?

Saunders – I think that defined contribution, drawdown and retirement income will be the three key drivers. In terms of strategy preferences, I suspect that interest in absolute return offerings will wane and factor-based multi-asset offerings will become a major growth area in the multi-asset space.

Blin – There will be a move towards less concentration because concentration causes a problem. Even a great portfolio manager can struggle because it has become too big. Style rotation can also be an issue. You may be a good portfolio manager, but then when that style goes out of favour for a given period of time, investors might be more eager to diversify their asset allocation.

Lynas – I’ve thought about this question from a pension scheme point of view and considering also that defined benefit pension schemes are maturing. They need two things at the moment. One is a move towards lower volatility. They want to de-risk over time so they’re looking at solutions that can deliver a low return for a low level of risk, and minimise drawdown.

Fox – We think that the defined contribution space in particular will continue to grow, and as defined contribution schemes get bigger then there’s the opportunity for them to diversify their manager risk as well. We believe that is going to drive more multi-asset opportunities.

The other element that is growing and which we expect to continue to grow in importance, is ESG [environmental, social, governance]. We already do a lot in this area but we continue to develop our approach along with other asset classes.

JB –  Multi-asset funds have got a lot of ground to cover. At the moment there are a lots of moves being made around ESG in terms of equities and corporate engagement. ESG designs into covenants for bond managers is somewhat behind the curve – some bond managers don’t even recognise their responsibility from an ESG point of view.

There’s still a complete nonchalance, I think, around the use of derivatives in ESG, so there’s no consideration whether ESG should pull from the underlying physical asset or whether it should actually pull from the contract issuer.

I don’t think multi-assets are really there yet.

©2017 funds europe



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