The general outlook for the multi-asset sector is for further and broader growth, spreading into new sectors and cannibalising sales of other funds.
This process has two drivers: The first is due to increased regulation, which is leading to more and more outsourcing of clients’ portfolios to multi-asset funds. The advent of the Retail Distribution Review has been especially key to the growth of multi-asset funds in the UK retail sector.
The second is the growing move away from single-product funds aiming to beat a benchmark to funds that focus on solutions, with multi-asset funds being the key component of these outcome-orientated solutions.
The need to provide an income due to the recent changes regarding the requirement to buy an annuity can be seen in this light and is likely to lead to a range of new income-orientated multi-asset funds.
Within this broader growth drive there will be three main changes.
The first is for funds to become more sophisticated in how they implement positions, and greater scrutiny of this by advisers and consultants. Just as fund managers need to explain their asset allocation process, so too will they need to explain how they implement the positions and why.
This will move the discussion away from the old choice between active and passive funds to incorporate a much larger range of possibilities.
For example, for many equity markets it is now cheaper to use an exchange-traded fund than using futures due to funding costs, and this can materially impact on returns.
The second will be a greater differentiation in the market between multi-asset funds that hold funds (fund-of-fund structures) versus funds that invest in stocks and bonds directly.
These are much harder to run but often offer superior as well as more bespoke solutions in addition to lower costs, and are likely to crowd out fund-of-fund structures in the future.
The third and final change has to do with the outlook for government bond yields and what this means for portfolios.
In the past, government bonds such as gilts provided diversification to portfolios (in that they rallied during risk-off periods) and made money overall as yields came down over the past 20 years.
Going forward, they are likely to struggle to provide this role as yields rise.
As such, there will be a marked divergence between multi-asset funds that approach divergence properly and those that simply hold lots of different things and call it diversification.
Nick Samouilhan is a multi-asset fund manager for Aviva Investors
