ROUNDTABLE: Jack of all trades?

Our expert panel discuss recent developments and trends in multi-asset investing and ponder the way forward for this most popular of asset classes.

David Bint (multi-asset investment specialist, Aberdeen Standard Investments)
Sam Roberts (director of investment consulting, Cartwright)
Bernard Nelson (head of multi-asset research, JLT)
Tom Wake-Walker (senior vice-president, Redington)

Funds Europe – When considering asset management products over the past ten to 20 years, how important is the development of multi-asset? Are they the most significant of all innovations in portfolio management for retail, DB [defined benefit] and DC [defined contribution] investors?

Sam Roberts, Cartwright – It is incredibly important, particularly for DC. The ability to have that one-stop shop for diversification is really useful as a concept in itself, and if it helps investors to not over-trade then that’s even better. In terms of DB, it is also very important, but a comfortable second to LDI [liability-driven investment].

David Bint, Aberdeen Standard – I’m not sure I’d be so presumptuous to say it is clearly the most important thing, though as a multi-asset specialist I believe that it probably is. The flows into products of that nature show there has been considerable embracing of the concept by retail investors, DC investors – frankly, by investors across the board. It’s also the case that multi-asset investing has embraced ideas and techniques that have been adopted in other areas. Trying to target outcomes, for example, rather than having an investment process driven by beating or achieving similar returns to an index or other benchmark. The notion of targeting an outcome or a risk level is extremely helpful for many investors, in the retail world in particular but also obviously for DC.

Also you can now find funds that will not just invest in equities and bonds and real estate, they will invest in a broad range of other asset classes that maybe ten years ago were not even considered, certainly not institutional-level investments with a reasonable level of liquidity. Some of the innovation in terms of understanding how these assets work together, and therefore in terms of diversification and risk, is at least in part down to the developments in multi-asset.

Tom Wake-Walker, Redington – Looking back over the past ten to 20 years or a little bit further, the choice is more limited for DC, and maybe retail investors. Our clients in that space potentially were more biased towards straightforward long-only equity funds. Multi-asset growth has opened up many more options for them. The access to differentiated asset classes is useful from a diversification standpoint. Rather than just a straightforward balanced allocation, having those additional asset classes and the ability to be more dynamic is a useful solution for our clients to have access to across a range of market scenarios.

As to whether it’s the most significant innovation, the increasing availability of passive offerings, low-fee offerings and ETFs has probably been a little bit more crucial. Particularly for the retail market, access to more straightforward equity exposure in a low-cost manner has been a bigger step change.

Bernard Nelson, JLT – When I started investment consulting, most of our clients were invested in a multi-asset fund. They typically had all of their assets in a multi-asset portfolio – we called it ‘balanced management’ then. It’s just evolved.

The most significant of all innovations? Not necessarily, though it’s been helpful by opening up areas investors would otherwise find difficult to access if they were to go through the process of choosing a manager just, for example, an EMD [emerging market debt] mandate or a loans mandate. If you can get that access within a fund, it’s quite useful.

Many individuals will have their money with an IFA [independent financial adviser] on a platform so they can access all sorts of funds because they’re not the only investor. Will that act against the development of multi-asset funds? The key is that multi-asset managers needs to demonstrate that they can add value in terms of the selection of the underlying assets and moving in and out of these asset classes at the right times.

Roberts – Investment platforms are a brilliant way for small/medium schemes to gain access to a wider range of asset classes in areas that wouldn’t otherwise be available. The platforms are brilliant for improving access for the small schemes – but it doesn’t mean they necessarily understand all the complexities.

Bint – In considering multi-asset as an innovation, it’s more than just what sort of funds are there now and what did there used to be. It’s to what degree have the techniques used in producing some of the new vehicles proliferated across the industry? Many of them have, and some of them haven’t.

Funds Europe – To what extent do you see multi-asset funds changing, going forward? You’ve raised the question of liquidity – can you see multi-asset funds growing into more illiquid assets in a balanced way, or do you always see multi-asset being purely liquid funds?

Roberts – The fund as a whole needs to remain liquid, so clearly it needs to be in proportion. But they already do go into illiquids, and that’s really where some of those other opportunities are coming from, because they’re harder to get at otherwise. It’s good to see that happening. In terms of evolution, whereas you could argue the multi-asset universe has been around for a long time, one of the ways in which it has developed is the variety within it – and what you see now is fantastic. When it comes to trying to target client outcomes, whatever they might be – getting the right level of volatility, or limiting the drawdowns – it’s all really healthy and enables us to help clients to add quite a lot of value.

Bint – Many people still see it as a one-stop shop. Consider a DC member’s journey from the beginning of working life until the end of life and, if there’s a bequest motive, beyond the end of life. A key issue is the management of risk at different stages of that journey. It’s perfectly possible to design a multi-asset portfolio that has a middling level of risk, that’s suitable across the entire lifespan so there is no need to be persistently changing that risk level, if you can get the right blend. One of the biggest risks is de-risking and re-risking – the management of risk is itself one of the biggest risks. One of the critical elements, if you look at how members generate their returns over time, is mean reversion. If you are de-risking at the wrong time, and you lose out on that mean reversion, then it’s quite penal.

Funds Europe – How well identified are multi-asset funds in terms of fund categories offered by trade associations and fund rating providers?

Nelson – This is getting very difficult. More and more multi-asset funds have the same objectives, cash plus four or something similar. That universe stretches from the absolute return type of funds at one end of the spectrum to a traditional balanced fund at the other, and they’ve all got the same performance objectives.

We try to subdivide the universe into the different types, but even that is proving more challenging than it used to be. More and more ‘traditional’ funds use all sorts of derivative techniques to hedge positions, and protect the downside. As a result, there can be very little correlation between the expected outcome and how the fund’s performed, and you’ve then got to look a bit deeper into it.

Wake-Walker – We tend not to use any of the categorisations that are laid out by trade associations and fund rating providers. We do look at the mixed investment classifications which are divided along percentage of equity holdings, but the managers we tend to look at don’t necessarily rigidly stay within guidelines, so we don’t tend to classify along those lines.

We instead break it down quite granularly. So for absolute return funds, we’d call them relative value diversified growth funds. Then we have asset allocation diversified growth funds which tend to be a little bit more long-only in nature. Then on the other end of the spectrum, we look quite closely at systematic strategies, things like risk parity or those that use a blended approach along with other systematic sub-strategies, which we call diversified risk premia.

But even with those classifications, it’s very difficult sometimes to really differentiate. It can be very difficult to communicate this to clients – they have one idea of a multi-asset fund, yet their managers could be investing in a whole host of different things in contrasting manners.

Bint – If you have a fund that only invests in equities, it’s easy that you call it an equity fund. If you have a fund that invests in equities and can put a little bit in bonds, does that suddenly make it multi-asset? Or does a multi-asset fund need to have three asset types, four asset types, five asset types? When does it actually become multi?

The ratings agencies have got to try and simplify it and make it easy for the individual retail investors or DC investors to understand what a fund does. They’ve got a really difficult job, and frankly some of the categories that they come up with are not necessarily the most useful.

As a retail investor, one of the key things you’d want to understand are the key metrics. You’d be interested in capacity for loss and also in the volatility. You’d obviously be interested in the return objectives, and you’d be interested in knowing how well this investment is going to blend with everything else that you hold.

Nelson – A retail investor may pick a multi-asset fund off the shelf but most of them won’t know how complex some of these funds are. Maybe some of these funds should come with an extra risk warning, or perhaps should only be available for ‘sophisticated investors’ that understand that there are currency, derivative and trading positions to consider?

Roberts – Ratings are trying to be simplistic for good reasons, to be helpful. It’s particularly difficult for the fund rating providers because they’re trying to create a system which works for everyone – and of course most people are probably going to disagree with how it’s put together.

We’re not doing our ratings for everybody, we do them for our UK pension scheme clients. We take a fund’s return target with a massive pinch of salt. A lot research goes on behind the scenes – we don’t want the client to have any surprises. The most straightforward way of doing that is to look at the volatility relative to equities. That’s not all you want to achieve, but that’s a big part of it.

Funds Europe – Where do multi-asset funds sit on the fee scale in relation to other products? Are fees gravitating to mean, or is there much dispersion? Can fees go lower? How might investors approach the topic of fees in this fund sector given the sometimes significant differences between multi-asset funds?

Roberts – If there’s a fund which is trying to break into the market, they’ll be keener on price. If there’s new opportunities, for example churn between different funds as objectives or performance changes, then that’s an opportunity to reduce prices to attract new money. On average we’ve seen fees come down – part of that is to do with the larger negotiating power of investment platforms, which benefits fund managers as well.

Nelson – The introduction of the cap is leading a number of providers to come out with similar funds to what they already have, only at a lower cost by using passive exposure in some element of the make-up. So, whereas perhaps two or three years ago the average was probably 60-70 basis points, the average now for these funds is more like 50-60 basis points. Seventy is probably the upper end, and certainly a few are happy to run the fund at 40 basis points, usually via a platform rather than direct. Can fees go lower? If they want to build a market share, or attract DC investors and retail investors, then quite possibly.

The other potential issue is if you’re now only getting gross returns of 2% or 3%, paying a high fee starts to really focus the mind. It’s a bit of a crunch year so far because virtually every multi-asset fund year-to-date is negative. So, there’ll be a lot of focus on fees and strategies over the next six to 12 months.

Bint – That’s true across the whole industry though, whether you look at multi-asset or at other asset classes. Across the asset management industry, the pressure is for lower fees at all levels. What has always been a challenge in multi-asset is to try and ensure debate about the fee to be not just about the return, but also about the diversification and the benefits of lower volatility, lower drawdowns and so on.

Wake-Walker – From a fee perspective, I was talking to my team who look at long-only equity managers, and from a comparison standpoint the fees aren’t outrageously different in terms of a high-quality long-only equity manager versus what we call an asset allocation diversified growth fund (DGF) manager within a multi-asset spectrum. We are seeing pressure on the fees coming through from our clients more than anything else actually, and that is linked to Bernard’s point about recent performance. It’s very difficult for some of our trustees to understand the benefits of diversification when you haven’t had a proper bear market for ten years. So when we were refreshing our ratings on these managers this time around, we put these arguments to them and negotiated lower fees based on this underperformance.

Roberts – Do you encourage performance fees? Because it sounds like that is really getting to the nub of what your clients are trying to achieve.

Wake-Walker – Absolutely. We didn’t for what we classify as discretionary multi-asset funds. However, within the more systematic side of things, we have entertained performance fees and we have managers there who effectively charge a very low management fee and a relatively significant performance fee, and sometimes with certain circumstances it makes sense for certain clients.

Funds Europe – What kind of front-office operational infrastructure do multi-asset funds require in terms of dealing platforms and other technologies?

Bint – We’ve talked at length about the benefits of risk control, understanding of risk, diversification, and so on. You would expect all funds, whether multi-asset or not, to have access to third-party risk models. But you might expect some multi-asset portfolios to have gone beyond that, and to be running proprietary models – either to look at the performance of individual strategies, or how they might perform in combination relative to the fund’s objective in both normal and stressed markets. What might happen to the portfolio if you were to have a US recession in two years’ time, or a crisis in China? The goal is to ensure that the integrity of the portfolio’s return expectations is maintained through much more complex market conditions.

Also, for funds that become more complicated in their implementation, what sort of additional burden does that bring in terms of infrastructure? You need to be thinking very acutely about the creditworthiness of counterparties, about all the documentation that needs to be in place, about the collateralisation and the management of cash and so on.

Funds Europe – From a consultant perspective, how much do you stress test multi-asset strategies in potential significant outcomes like China, like the US?

Wake-Walker – It’s possible. You do need to make some proxy assumptions in terms of the modelling that you can do internally, unless you’re receiving daily data on individual position levels at the fund. We run scenario analysis in-house, but it’s generally upon betas or risk exposures that we attribute to asset classes as a whole. When we’re doing due diligence on particular managers, we do pay attention to the internal risk systems they have developed, but we also generally expect them to make use of an external provider as well.

Roberts – We’re not trying to do the fund manager’s job for them. It’s more important to ask the right questions to see whether the fund manager is going through the right process and has the right systems.

Nelson – Systems, administration and infrastructure are checklist points that we look at, but again, try to ask the right questions and based on their answers, see who is more up to speed and who’s behind, and mark that accordingly.

Bint – What obviously counts for something with the ratings agencies and consultancies is when you have funds with a longer track record that have actually been through some of these stressed events and performed as you would have anticipated they should.

Funds Europe – In Europe, which have been the strongest markets for multi-asset funds? Are there other trends to note within these markets?

Bint – Stepping back from multi-asset again, if you look globally then fund sales this year are less than last year, or the rate of growth of sales has been slower. That would be true for multi-asset as well. Nevertheless, in certain parts of the world, particularly Europe, multi-asset sales remain pretty strong. As far as we can tell, a lot of multi-asset sales have been for funds that are generally regarded as more conservative and typically more long-only. The main markets have been Italy, Germany, Belgium, Spain, probably more or less in that order. In the UK, we’ve seen levels of interest in multi-asset start to come off, and that’s true across all multi-asset strategies, not just absolute return.

Roberts – We have seen some cases where clients who still have a relatively large home market bias have taken the EU referendum as a trigger to reassess whether they should be more global in their investments. There’s a variety of different ways of doing that. One of them would be to go from UK equities to a multi-asset fund which is more global, noting all the overseas earnings from those FTSE 100 companies, obviously.

We have also had some clients who have hedged some or all of their non-sterling exposure in reaction to the weakening pound.

Bint – When you’ve seen equities be so strong, and the associated element of regret risk, there is the danger that fund sales reflect people fighting a battle that’s already been won or lost as opposed to looking forward. There is survey data assessing where investors are likely to move their money in future which suggests that, for instance in Germany, intentions to invest in absolute return are quite strong. Whether those intentions actually become reality of course remains to be seen.

Nelson – That’s in Europe, where presumably there’s been much more of a fixed interest bias over many, many years. They’ve been rewarded because yields have gone down and down, with some countries at negative yields, and if they’re now on the turn and fixed interest yields are creeping up, then multi-asset in an absolute return type fund is superficially attractive. The manager in theory can be short as well as long in those markets and obtain a positive return.

In the UK, quite a lot of money has gone out of bonds into multi-assets within a DB context. They’ve used LDI to get more exposure to interest rates, but then sell the traditional fixed interest and bought multi-asset. The idea was you needed Libor plus against the LDI part of the portfolio – so a fund promising Libor plus 4% seemed an ideal fit. Whether that’s quite worked out when you’ve got Libor minus of late is another story.

Wake-Walker – We have limited exposure to European and global clients, but they have been equally as receptive to multi-asset funds as our more UK-oriented clients. So there’s no hurdle there in terms of client training and understanding these multi-asset funds just because clients may be based on the Continent. Over the last year we’ve found two or three managers based outside of the UK who we think do an excellent job in terms of running multi-asset funds. So when you’re doing research on multi-assets funds, you don’t want to look too narrowly at London and Edinburgh. Because of the very wide array of classifications for multi-asset, we have found that you do need to cast the net a little bit wider.

Funds Europe – How do you envisage the development of this product set over the next 12 to 18 months?

Roberts – We’re seeing more focus on potential drawdowns, in addition to reducing volatility. A few years ago, DGFs [diversified growth funds] were just about getting some diversification against equities; now it’s more about ‘if we need to sell some of our investments to pay members’ benefits, given we’re paying out more than we’re getting in on a regular basis, where do we get that money from?’ ‘Will we need something more stable?’ So drawdowns become an issue. Also, funds are getting better at highlighting the key differences between each other – there’s quite a wide variety which is obviously useful, especially when it comes to blending styles.

Bint – Three things that come to mind, and the first and the last are likely linked together in some way. The first is the increasing need for funds to generate income, and that’s true even for some DB schemes that are now cashflow-negative and have been for a while. That might be a reflection of success, but nevertheless, some of these schemes are addressing that by wanting more natural income in the portfolio. Retail investors have liked natural income for some time, so while everybody talks about DGFs, maybe DIFs – diversified income funds – would become something that’s more important.

Secondly, across the whole industry, there is an increasing move to technology, which ultimately points towards use of machine learning and artificial intelligence. Moving beyond smart/smarter beta to another level of sophistication in quant would be very directly applicable in multi-asset.

The third, and probably biggest issue of all – which again is not just a multi-asset issue but a global investment issue – is solving the problem of decumulation or drawdown in later life for all savers. Whether they be retail, DC, whatever, finding investment vehicles and strategies that will help them through that later life. This whole issue of managing money through retirement and possibly beyond is a global issue, and multi-asset almost certainly has a part to play in that – but it’s not likely to be the whole solution of itself.

Wake-Walker – We’ve seen recently some shoehorning of systematic strategies into discretionary products. Whether that’s symptomatic of the charge cap coming in, and people wanting slightly lower fees, lower cost levels, and being able to attribute 30% of a portfolio to effectively a rules-based mechanism, I don’t know. But this blending between the two is something I would expect to continue to develop.

Nelson – There are definitely managers getting in touch with me who are trying to pick up business from absolute return products. We could be at an interesting point in time. If clients have invested in these products on the basis that they would obtain an absolute return, yet there’s a question mark as to whether anything should be called ‘absolute return’ in any market conditions, then many of those clients are just going to give up on that sector entirely. However, it’s not obvious where they’re going to move to.

So there’s going to be a lot soul-searching. It may be that there’s a wholesale desertion of the multi-asset products in favour of other options such as multi-asset credit. To a large extent, multi-asset credit is probably easier to understand for a lot of clients. So if you’ve gone through this difficult period where they’ve been in a fund believing it was low risk, getting cash plus 4% or Libor or CPI plus 5%, and they’ve had a 6%-7% drawdown this year, are those investors going to just jump back into another type of multi-asset fund? They could instead go to a more traditional fund which they better understand and embrace volatility for the sake of enhanced returns. Alternatively, they could opt for multi-asset credit, which is a bit more complicated but where they still have a better chance of understanding what’s going on.

Roberts – It would be a shame if clients ignored any asset class because a couple of funds were underperforming. In any asset class, you’re always going to have a natural evolution regarding the buy list. Things don’t last forever, that’s why research is done on a continuously.

Having said that, I’d agree with your multi-asset credit point, although we use the term ‘diversified growth’ which includes those funds. So clients are looking at the whole spectrum of funds which consider both risk and return in making investment decisions, all the way from your higher beta through to what we normally think of as absolute return bonds. It’s the whole spectrum and multi-asset credit would sit in there too.

We’re seeing a rotation within the diversified growth asset class away from more complex funds and towards simpler funds. Do simpler-to-understand funds do as well in the type of scenarios that the more complicated funds are looking at? Not necessarily. But clients understanding what those funds are meant to do in different market situations is crucial to allow them to invest through the market cycle and avoid any surprises.

Nelson – The research I’ve done over the last couple of years is that, even at the simpler end of the fund structures, there’s a lot more complexity than a lot of investors appreciate in terms of the implementation of strategies. The average trustee will be surprised to know that they implement a lot of their asset allocation positions by using option strategies, for example. Simplicity might re-emerge if the complex allocation isn’t delivering the results.

Roberts – At face value at least, simpler implies cheaper – but hopefully doesn’t imply worse value. We’ll have to wait and see.

Wake-Walker – I agree it would be an enormous shame if there are clients who have been invested in multi-asset funds that have been paying for diversification thinking that they’ve been paying for an insurance premium – and because they haven’t had to call in the insurance, they’re thinking that they’re now going to sell it. Decisions should be made looking forward, not looking backwards.

©2018 funds europe



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