Why have multi-asset funds proved so popular?

For a long time, the most sought after categories when selecting traditional funds were pure asset classes. In contrast, asset allocation funds called “balanced” or “multi-asset”, depending on the terminology specific to each country, were of little interest. Since asset allocation is regarded as being the core of a wealth manager’s expertise, the latter were not willing to delegate the capital deployment or tactical allocation decisions. Manager selection was confined to adding alpha while retaining control over beta.

Yet in the course of the last five years the European multi-asset funds market has recorded uninterrupted inflows of new money, which reached record levels last year at more than Ä80bn. With total assets exceeding €600bn, this is the largest universe of mutual funds marketed in Europe, according to Lipper FMI statistics. While in some countries tax or operational reasons prompted selectors to gradually increase their interest in this type of product, more fundamental arguments are behind this rise in popularity.

Firstly, the macro-economic environment in place for several years has become challenging for investment performance. The historical diversification criteria of a balanced portfolio, which could only allocate to a mix of long positions in equities, bonds and cash, no longer provide adequate capital protection. These funds have not worked out during the recent crisis and the average drawdown recorded by these conventional allocation strategies has demonstrated the limits of this approach.

Secondly, the stimulus measures undertaken by governments and central banks to revive growth have deprived the risk-averse investor – or, more conventionally, those investing in bonds – of a historically low-risk source of income. With negative real returns on cash and a bond market whose interest rates stand at an all-time low, the search for alternative solutions to this type of investment is in full swing. Multi-asset funds with a conservative strategy have undeniably benefited from this trend.

Finally, the funds of hedge funds that had helped to give any type of portfolio broad access to alternative management have been sustaining regular outflows for five years. This trend favours some multi-asset funds that pursue and have achieved an absolute performance objective. This objective is similar to that of alternative investments but with better liquidity terms.

At the same time, a number of multi-asset products have become more sophisticated in order to achieve their absolute performance objective.  This shift took place, first, by recruiting talented managers from the hedge fund industry or traders and, second, by implementing relative valuation strategies and using financial leverage by employing OTC derivatives allowed by the new regulatory framework. The borderline between this new generation of asset allocation funds and hedge funds has therefore become blurred. They could be given the name of “global macro” or “multi-strat”.

But more than all qualitative factors, it is results achieved that have generated interest, as the average annual performance over the last five years of the 50 largest multi-asset funds was 8.96 per cent.

However, with more than 4,600 funds exhibiting huge diversity within this product family, the task of selection has become more complex.

Investors have shifted their preference to funds of the flexible or moderate-risk type. The first category is for funds where the portion invested in equities can vary greatly depending on the capital preservation objective. In the second category, the portion invested in equities generally varies up to a maximum of 35 per cent. Reviewing the 60 largest products in this universe, which account for 40 per cent of the total assets, 38 per cent are funds of the moderate-risk type and 27 per cent of the flexible type. These two categories account for two thirds of the multi-assets funds universe.

The heterogeneous aspect of this universe of multi-asset funds considerably complicates the selection process. We find these obstacles throughout the qualitative analysis process, when attempting to extract or understand key performance drivers, identify risk factors, and assess contribution of each member of often large teams, which in turn increases the amount of contact required with managers and prolongs the decision-making process.

In conclusion, it would be a shame to give in to discouragement and deprive oneself of this source of performance.  Many talented managers from a wide variety of investment backgrounds have helped to enhance expertise and improve funds available in the multi-asset sector, which are no longer traditional at all. We also note the success of boutiques that have become a must in this area, as their non-conformist investment culture geared to capital protection has enabled them to deliver some particularly attractive and, above all, very consistent performances.   

Katia Coudray Cornu, head of Syz Fund Research, Banque Syz & Co