A report attacking the suitability and value for money of multi-asset funds has ignited a debate on whether investors should opt for cheaper and simpler funds to get better returns.
The study from consultancy firm Finalytiq claims “unskillful” multi-asset managers do not add value to their clients’ portfolios and “systematically” damage their returns.
But industry experts have challenged the findings and methodology, and argued financial markets are behind multi-asset funds’ unfavourable comparison with a straight, low-cost equity/bond mix.
Money Marketing examines whether the criticism that has been levelled at multi-asset funds is warranted, and whether adopting a multi-asset strategy is truly delivering for advisers and investors.
‘Apples and carrots’
The Finalytiq report rates 67 multi-asset fund ranges with charges ranging from 0.24 per cent a year up to 2.62 per cent a year, and also looks at performance and parent provider. The study compared each range with a series of simple equity and bond portfolios over one, three, five and 10-year periods.
Just one fund range, the Vanguard LifeStrategy fund, is rated as “excellent” value for money, eight were rated good and the remaining 58 were “fair” or “poor”.
Among the fair and poor rated ranges were Standard Life MyFolio, the Jupiter Merlin range and Schroders multi-manager range.
Finalytiq founder Abraham Okusanya says multi-asset funds can work.
But he goes on to say: “What we find here is multi-asset managers don’t add value over and above a simple low-cost equity-bond portfolio.
“We find several instances of an inconsistent risk-reward relationship, where clients in higher risk portfolios are systematically being compensated with less return than clients in lower risk portfolios.”
But Square Mile head of risk-based solutions Alex Farlow says it is not fair to look at performance when judging multi-asset funds rather than fund objectives.
He says: “All funds should be judged on what they’re trying to achieve, and whether the objectives are unrealistic or not challenging enough. But if the objective sounds sensible a fund manager should be judged on what they are trying to achieve and whether they’ve actually delivered that.
“Risk-targeted funds are managed according to a particular risk profile or risk band and trying to manage risk within those bands is the primary objective. The return is important as well but it is not the primary concern.”
Gbi2 managing director Graham Bentley also questions the reports’ comparisons between funds with different targets.
He says: “Risk-targeted funds are managed according to a standard deviation target so you’ve got to be very careful in targeting one group of multi-asset funds which are managed for returns, such as Jupiter Merlin range, versus another group which are managed towards a risk target, such as Standard Life’s MyFolio or Spectrum from Old Mutual. They are not managed in the same way or with the same objectives; it is like comparing apples and carrots.”
The report says investors poured £3.5bn into mixed asset funds in 2015 alone. Overall, £173bn is invested in multi-asset funds, according to the Investment Association.
Farlow says: “In the multi-asset space because there is such a big range from the lower risk to the higher risk, funds are trying to do specific things and deliver income.
“As everyone wants income now and bond yields are at historic low levels, lots of people argue at the moment investing in these type of assets is high risk, because they are overvalued on a historic base.”
The latest data from Platforum shows that out of 203 advisers, 81 per cent say they have recommended multi manager or multi-asset funds to their clients.
Some 21 per cent of advisers hold up to 10 per cent of clients’ assets in multi-asset funds.
Former Investment Association chief executive Daniel Godfrey says the fund management industry is wrongly focused on short-term volatility for these types of funds rather than permanent loss of capital.
He says: “A lot of these strategies are aiming to control volatility on a relatively short-term time horizon but is this what investors need when they are told that investing in capital markets is a long-term game?”
A recent report from analytics firm Cerulli Associates found multi-asset funds have failed to deliver positive returns over the past 12 months in the pre and post-Brexit market volatility. However, commentators say it is not fair to judge their performance over such a short-term period.
The multi-asset approach
Commentators say it is wrong to assess multi-asset funds against funds with single asset classes. They also challenge the five-year time horizon used by Finalytiq given the recent challenges within markets.
Tilney Bestinvest managing director Jason Hollands says: ”This has been a time period which has experienced a synchronised bull market in equities and bonds fuelled by an unprecedented global experiment in central bank money printing, so understandably portfolios narrowly exposed to these asset classes and with no cash drag have performed well.
“During this environment of vast monetary stimulus, there has been a very high degree of correlation across risks assets, reducing the scope to add value by asset allocation. But these are most certainly not normal market conditions and will not continue indefinitely. The efficacy of a multi-asset approach will only truly be tested across a period of down markets as well as up markets.”
Others question the report’s use of the index tracking Vanguard LifeStrategy fund whose specific structure has helped it achieve better returns than multi-asset funds.
Farlow says: “Post-Brexit a lot of the large companies have done well and that will favour the index tracking funds because they’re going to have a larger exposure and a lot of active managers tend to invest more in small and mid caps which have not done very well.
“The Vanguard fund has also a bias towards the US and the dollar which has been pretty strong as well so that is a function of the structure of the fund. A lot of the risk-targeted funds we look at are more forward looking than that and they are trying to manage the risk as well as the return rather than just see the overall level of return.”
A Standard Life Investments spokeswoman says: “The MyFolio range of funds does not reside in any specific IA sector and the funds are not constructed relative to any benchmark or other industry fund groupings. Therefore, consideration of a MyFolio fund should be taken in context of its own range rather than a non-representative peer group.”
A Schroders spokeswoman says: “The Schroder Multi Manager funds have medium to long-term performance objectives, in line with those of our clients. Over a five-year period the funds have outperformed their benchmarks. Over a three-year period the two more cautiously managed funds in the range, Schroder Diversity Income and Schroder Diversity, have outperformed the CPI benchmark.
“The other funds have marginally lagged the benchmark over a three-year period due to our underweight position to bonds and bond proxies.”
Experts says active managers can add value over the long term but not all of the active managers would be able to do so.
Chelsea Financial Services managing director Darius McDermott argues adding value through asset allocation is not the only way for fund managers to find ways to deliver positive returns.
He says: “There is a vast range of multi-asset funds and they need to show mangers can add value.
“For example, Rob Burdett and Gary Potter on the F&C multi-asset funds don’t try to add value by asset allocation, but they do that though research within a broad team.
“Another example is Steven Andrew, responsible for the M&G Episode Income fund. He starts with behavioural finance to find value. He’s not huge in asset allocation but he’ll look at assets that other managers don’t.”
Expert comment: Alex Farlow
Clearly there are going to be some funds that do less well than others but it would be unfair to say there are not many active managers that are adding value.
What we try to do is break the asset allocation down and see what the fund is doing to achieve its objectives. We look at whether the manager is adding value from their decision-making rather than the overall structure of the fund, because a particular fund’s structure may look very good in a particular environment and not in another.
Of course, performance is important but the most important thing from an investor’s perspective is whether this is the performance they expect. Most investors would be happy if they get a return that is in line with their expectations rather than significantly higher or lower.
Over the last few years there has been a lot of cost cutting across the board and passive providers have positively helped to drive costs. But passive is not going to be the answer for everyone. There are managers out there which use active asset allocation and among them there are going to be those who can show they are adding value.
Alex Farlow is head of risk-based solutions research at Square Mile
Dennis Hall managing director Yellowtail Financial Planning
We haven’t use multi asset funds for a while mainly because of the cost drag. For clients with smaller amount of money we would use the Vanguard LifeStyle fund as it works and costs are low and it is very process driven. The problem with some second and third generation multi-asset funds is costs and so these won’t work in the long term.