Your IndustrySep 18 2014

Multi-asset performance in different conditions

twitter-iconfacebook-iconlinkedin-iconmail-iconprint-icon
Search supported by

Some would argue the performance of multi-asset funds tend to occupy the middle ground rather than deliver any outstanding outperformance, says David Jane, manager of multi-asset funds at Miton.

Mr Jane says this school of thought argues top-line performance will not favour multi-asset funds because the fund blends the best performers with other holdings in order to diversify, so it can never do as well as the best single-strategy funds.

He says: “Multi-asset fund managers should be able to provide reasonable returns during the good times and to shield investors during the worst of times.

“However, this will depend on the portfolios’ fund objective and investment policy and, of course, the fund manager’s ability to deliver on these.”

James Bateman, head of portfolio management of Fidelity Solutions, says advisers should find a multi-asset fund is typically designed to achieve a smoother set of returns over the long run.

He says: “They are usually actively-managed, where a portfolio manager can make tactical moves between asset classes throughout a market cycle.

“By spreading its allocation (and risk) across different asset classes, a multi-asset strategy can avoid the dramatic drawdowns suffered by single asset classes at various points in the market cycle.

“The flipside, of course, is that multi-asset strategies are unlikely to outperform single asset class strategies during periods of particularly strong performance for that asset class.”

Multi-asset funds differ in their risk levels and investment objectives, and James Priday, director of Strawberry Invest, says a fund’s equity content is a key consideration when it comes to considering performance.

Unsurprisingly, Mr Priday says in general rising equity markets have seen the average fund in the IMA Mixed Investment 40 to 85 per cent Shares sector should outperform the average fund in the IMA Mixed Investment 0 to 35 per cent Shares sector, given its greater equity content.

On the flip side, in generally falling equity markets, Mr Priday says the fund with the lower equity content should outperform the fund with the greater equity content.

Mr Priday says: “The investment objective of a multi-asset fund can also affect performance in different market conditions.

“For example, an income-orientated multi-asset fund may focus its UK equity exposure in traditionally higher-yielding sectors such as pharmaceuticals, tobacco and utilities; an alternative, capital growth-orientated multi-asset fund may focus its UK equity exposure in traditionally lower-yielding sectors such as support services, household goods and software and computer services.

“The performance of different sectors of the market will therefore have a great impact on different multi-asset funds.”

Broadly speaking, Mark Wright says multi-asset funds are likely to underperform when markets are rising rapidly but equally have the potential to significantly outperform when markets fall. Multi-asset funds are most likely to disappoint investors when the majority of asset classes correlate to one, he adds.

Mr Wright says: “As is always the case with investments, past performance can often be a poor guide to future returns.

“It is important for investors to understand what the drivers were behind any period of significant outperformance and assess the likelihood of it being repeated.

“It is more difficult to model or anticipate the performance of highly flexible multi-asset funds in different market conditions, as the performance relies on one manager making large judgment calls.

“In contrast, the performance of multi-asset funds that adhere to a rigid strategic asset allocation through the investment cycle should be easier to anticipate.”

Advisers should expect performance to depend very much on the individual fund, says Juliet Schooling Latter, head of research at Chelsea Financial Services.

She says the one thing they should all have in common though is that they should be less volatile than any fund investing in a single asset class.

Ms Schooling Latter says: “You would generally expect them to lag in strongly rising markets, but to drop less in falling markets too.

“This assumption was rather put to the test during the initial stages of the global financial crisis, when the correlation between asset classes increased for a short period of time and we saw most assets fall.

“It should be remembered though, that they didn’t fall in the same magnitude and that the correlation has since lessened once again.”