What funds are available, what you can use them for and how to pick the best

Dylan Emery

Editor, Expert Investor

Multi-asset funds have had an astonishing level of success in recent times. Since 1980, more than 11,000 multi-asset funds have been launched.

 

The space has been dominated by the standard, long-only style of fund, generally structured around a mixed equity/bond benchmark. Assets in these products have quadrupled in the past 10 years. Then we’ve seen the rise of alternatives, especially unconstrained funds and hedge strategies, typically structured as Ucits products.

Total number of multi-asset funds opened since 1980

AUM % split of equity, bond, multi-asset and alternative funds

AUM in
multi-strat

funds

1460bn

Europe inc UK-domiciled funds. Includes long-only multi-asset, unconstrained bonds & multi-strat hedge.

Source: Morningstar Europe inc. UK-domiciled universe
Roll over for more info

Source: Morningstar Europe inc. UK-domiciled universe
Roll over for more info

If you look at the AUM % split chart, you’ll see that after the crash in 2007/2008 equities lost sharply to bonds. Despite the recovery of the markets since then, equities have not recovered their market share – instead you can see only two winners: long-only multi-asset and alternatives.

 

The big problem

 

So why have multi-asset funds become so successful? Are they a tool every fund picker should be familiar with? If so, which strategies offer the most value – and of course, how should you pick them?

 

To answer these questions, we have brought together three managers of multi-asset funds and three of the highest-profile buyers of multi-asset funds in Europe and asked them to give their insight. Welcome to the Expert Investor Multi-asset Roundtable debate!

Gabriel Bartholdi

Head of asset allocation,

Wellershof & Partners

Michalis Fessas

Head of fund selection,

Eurobank Asset Management

Lucas Strojny

Head of discretionary mandates, Advenis Investment Managers

Sebastien Page

Head of asset allocation,

T Rowe Price

Nicholas Samouilhan

Co-manager, Aviva Investors Multi-Strategy Income Fund

Vincent McEntegart

Manager, Kames Global Diversified Income Fund

This is not as simple a question as it might seem. The problem with the multi-asset label is that it covers a huge array of strategies and outcomes. Each fund makes money in radically different ways, shows different sorts of skill and – crucially – deserves to be paid different amounts.

 

According to Nicholas Samouilhan, co-manager of the Aviva Investors Multi-Strategy Target Income Fund, this variety shows the industry has been working hard for end investors.

 

“On the one side, you get funds that give you purely passive exposure to market beta and you can access this quite cheaply. Over the long-term time horizon, it’s perfect for many clients,” he says.

 

“Then you have multi-strategy funds where a greater proportion of returns is down to alpha but which also focus on managing volatility. It's important you work out how much of your total return will come from market exposure, how much from alpha, and the value you place on protecting the portfolio against market turbulence.”

 

Changing times

 

Vincent McEntegart, who manages the Kames Global Diversified Income Fund, says: “One big move we’ve seen is away from peer groups and market benchmarks and towards outcomes.

 

“In the case of our fund we have an income target of 5% and 2-3% growth over the medium term. In a sense, what we are saying to the investor is ‘trust us to deliver this. Forget about equity indices like FTSE All-Share, the S&P 500 – this multi-asset fund is designed to meet its income and capital growth targets with half to two-thirds of the volatility of global equities.”

 

In this short video, McEntegart talks about how he has seen the multi-asset industry change in the past 20 years and he asks an important question for fund selectors: where do multi-asset funds fit in your portfolio?

What is your main reason for using
multi-asset funds?
%

Roll over segments

for more info

Source: Last Word Research. Survey of 50 of Europe's top fund selectors and asset allocators from 13 countries

Vincent McEntegart, manager, Kames Global Diversified Income Fund

Hard targets

 

Sebastien Page, T Rowe Price’s head of asset allocation, reminds us that it’s very tough to beat the market.

 

“We had an institutional client come to us recently and ask for a Libor plus 5 strategy,” he says. “We looked at the universe of Libor-benchmarked strategies. We found 30 of them. Twenty-eight out of 30 underperformed a 60/40 portfolio over the past five years.

 

Another challenge is that the term multi-asset is so broad that each product can offer value in a different way.

 

In this video, Samouilhan talks about the choices available to fund selectors and how best to employ them. Fund selectors should also be aware of the different psychological factors at play, especially as they affect your end client.

Nicholas Samouilhan, co-manager, Aviva Investors Multi-Strategy Target Income Fund

The benchmark/absolute dilemma

 

Another issue is the impact of switching from benchmarked to absolute-return funds.

 

Michalis Fessas, head of fund selection at Eurobank Asset Management, gives a practical example of the problem.

 

“When you buy a US equity fund that has an S&P 500 benchmark then you know the benchmark might do 8-10% and the fund is going to be maybe 200 basis points under or over this benchmark,” he says. If a fund underperforms and gets 6% instead of 8%, the client is still likely to be willing to consider holding the fund.

 

“But in the absolute space, the investor experiences something different; an underperformance in this space means a negative return, which is much more painful for the end investor and he is more prone to sell.”

 

This behavioural bias should be taken into account by fund selectors.

 

Says Fessas: “When you select a multi-asset fund, especially one without a benchmark, you are assigning part of your clients’ asset allocation to the asset manager, which is a very big power. And, as the motto of the movie Spiderman goes, ‘with great power comes great responsibility’.”

Do you use
currency-hedged multi-asset funds?

%

Roll over segments

for more info

Source: Last Word Research. Survey of 50 of Europe's top fund selectors and asset allocators from 13 countries

Fund selection is one of the hardest things to get consistently right, the reason being there is so much luck involved in the performance of a fund that it is tough to identify what might be value-adding skill.

 

Page gives a great illustration of the problem: “Andrew Lo, an MIT professor, published a paper in 2001 on risk management for hedge funds. Using data from the 1990s, he created a simulation that doubled the Sharpe ratio of the S&P 500.”

 

He was systematically selling out-of-the-money put options, generating very stable returns.

 

“So the analysis of the track record throughout the ’90s would have revealed nothing: it would have revealed a doubled Sharpe ratio. The analysis of the process would have shown there was no skill. Essentially, by shorting options, it was just loading up on tail risk.”

 

The vital thing when analysing multi-asset funds, according to Page, is for the selector to give a clear breakdown of the skills a manager can provide – strategic asset allocation, tactical asset allocation, stock selection. He outlines his analysis in this short video.

Sebastien Page, head of asset allocation, T Rowe Price

Measuring up

 

An issue that affects all fund selection but has special challenges for multi-asset is how to use past performance. While data analysis can't necessarily tell you how the fund will perform in future, it can reveal a better understanding of how it will tend to perform in different market and macro environments.

 

Lucas Strojny, head of discretionary mandates at Advenis Investment Managers, believes one of the single most telling metrics is maximum drawdown divided by volatility. “It’s a good way to compare funds with different risk profiles,” he says. “It is also always interesting to compare the performance attribution the manager gives us with what our in-house statistical analysis shows.”

 

Gabriel Bartholdi, head of asset allocation at Wellershoff & Partners, agrees with Strojny’s choice of metrics and adds more. “Maximum drawdown, time under water – these risk factors are much more important than simple volatility,” he says.

 

Under pressure

 

Fessas similarly focuses on drawdown but in a particular sense: how does the fund react when things go wrong?

 

“Every fund manager makes mistakes,” he says. “What makes the difference is how much you gain when you make a good trade and how much you lose from a bad trade. One needs to examine how the risk management worked during drawdowns. Did the controls work?”

 

“Also, we don’t like changes within the team,” says Bartholdi. “In the end, you are buying the track record of the fund manager and I want to have the same managers because that way I think the fund is more likely to act the same way in the future as in the past.”

 

The final kicker for fund selectors is that end clients tend to have a much shorter time horizon than you need to show manager skill. “We are measured year-by-year and our bonuses are paid year-by-year,” says Bartholdi. “We aim for longer-term returns than this but we have to focus on short-term risks.”

 

He gives the example of a manager with an impressive information ratio score of 0.7. Mathematically, in a typical worse-case scenario, that manager could easily underperform for more than a year.

 

“A more typical information ratio would be 0.2-0.3, and in that circumstance the manager might underperform for three years,” says Bartholdi. “But the market won’t wait four years for them to show their skill.”

 

Multi-asset funds are generally explicitly created to minimise that problem by reducing downside risk, which is one of the reasons that they are likely to continue being one of the big success stories of the fund management industry.

Which multi-asset style is most popular with your clients?

%

Roll over segments

for more info

Source: Last Word Research. Survey of 50 of Europe's top fund selectors and asset allocators from 13 countries

This is not as simple a question as it might seem. The problem with the multi-asset label is that it covers a huge array of strategies and outcomes. Each fund makes money in radically different ways, shows different sorts of skill and – crucially – deserves to be paid different amounts.

 

According to Nicholas Samouilhan, co-manager of the Aviva Investors Multi-Strategy Target Income Fund, this variety shows the industry has been working hard for end investors.

 

“On the one side, you get funds that give you purely passive exposure to market beta and you can access this quite cheaply. Over the long-term time horizon, it’s perfect for many clients,” he says.

 

“Then you have multi-strategy funds where a greater proportion of returns is down to alpha but which also focus on managing volatility. It's important you work out how much of your total return will come from market exposure, how much from alpha, and the value you place on protecting the portfolio against market turbulence.”

Changing times

 

Vincent McEntegart, who manages the Kames Global Diversified Income Fund, says: “One big move we’ve seen is away from peer groups and market benchmarks and towards outcomes. “In the case of our fund we have an income target of 5% and 2-3% growth over the medium term. In a sense, what we are saying to the investor is ‘trust us to deliver this. Forget about equity indices like FTSE All-Share, the S&P 500 – this multi-asset fund is designed to meet its income and capital growth targets with half to two thirds of the volatility of global equity markets.”

 

In this short video, McEntegart talks about how he has seen the multi-asset industry change in the past 20 years and he asks an important question for fund selectors: where do multi-asset funds fit in your portfolio?