Fitch: European multi-asset funds must rethink asset allocation

A report by Fitch Ratings has warned European multi-asset funds that they need to rethink asset allocation and market timing.

The ratings agency found “volatile markets without clear trends” have imp arid tactical asset allocation with fund diversification suffering from a rise in asset class correlation.

According to Fitch, average returns in the Lipper Global Mixed Asset category meet investors expectations and asset liability requirements over three years, but fall significantly over five years.

“Surprisingly, flexible allocation funds that have larger latitude in their investment decisions have been doing particularly poorly on average,” it adds.

The ratings agency claims the lack of positive risk premium in equity markets since 2007 has been detrimental to long-term strategic asset allocation for multi-asset funds. The report also finds investors “increasingly scrutinise” strategic asset allocation strategy to match objectives and look out for more low-risk and income oriented products.

Fitch has found fund managers have started to rethink the portfolio construction process and consider “more efficient risk budgeting to protect themselves from undue risk consideration”.

However, it warns that rule-based portfolio rebalancing is intentionally dependent on past volatility and allocation weights towards fixed-income assets would put funds at risk should global interest rates reverse.

It calls for a qualitative overlay to capture structural changes and market overreaction.

“Fitch believes risk-based allocation is no panacea but can add to style diversification among investors’ portfolios,” it reports. “Managers with a blend ofqualitative and quantitative approaches seem best positioned to meet allocation and market timing challenges in multi-asset funds.”