Multi-asset funds have attracted record interest from investors in 2014. Data from Lipper shows that multi-asset funds in Europe, including funds of funds, attracted more than €171bn (£121bn) in 2014, almost €50bn (£35bn) more than in 2013. In our analysis we explore the reasons behind their appeal.
Since the start of the global financial crisis many things have changed. Central banks around the world have lowered their key interest rates and engaged in unconventional easing measures. This has led to an unprecedented decline in government bond yields in developed market economies. While this decline has been going on for more than 30 years now, delivering very attractive returns for fixed income investors, yields have recently fallen to such extremely low levels that little upside remains.
At the same time historically high levels of volatility in bond markets have been observed – yields on fixed income portfolios at or close to their lowest levels ever, together with increased risks present a major challenge for investors and their advisers. On one hand, the search for yield and return theme continues to unfold, while on the other hand the demand for lower-risk strategies only increases given demographic changes, stricter regulations and the collective memory of the 2008 financial crisis which has reduced investors’ ability and/or willingness to take risk.
As a result, investors are turning to professional investment managers who are able to provide the right balance of risk and return. Many managers of multi-asset funds are well-positioned to serve this need for several reasons, which we explore next.
Firstly, in a world where yield and returns are scarce and come at a price of high risk, flexibility is a big advantage. By definition, portfolio managers overseeing multi-asset funds have a broader set of opportunities to act upon than those overseeing single asset class funds. This is a big advantage in the eyes of clients and their advisers. Multiple academic studies have provided support for the hypothesis that mutual fund returns can to a large extent be explained by top-down asset allocation decisions among major asset classes. Skilled multi-asset managers who can make the right allocation calls can therefore provide a very appealing proposition for their investors.
However, many multi-asset funds are flexible enough to enable their managers to enhance the returns even beyond what can be achieved by the first top-down asset allocation decision. Portfolio theory tells us that given an asset manager’s skill, as measured by her information coefficient – a numerical expression of how often the investor makes the right calls – performance should improve as breadth (a higher number of independent views) increases. It is therefore desirable for any asset manager to have more granular views in a portfolio, next to the traditional top-down asset allocation between equities and fixed income, assuming a fund manager is be able to generate correct investment views. For example, the ability to form and act upon an accurate opinion on the outlook of sectors and regions next to asset classes can provide additional sources of return. Implementing a broad set of independent investment views in a portfolio also helps to manage (active) risk. This improves the risk-return trade-off and helps to increase the attractiveness to investors. To summarize, the key to success is the ability to use a wide set of opportunities and tap into a diversity of return sources.
