Advisers duplicating investment choices
Advisers are doubling up on asset allocation decisions because many popular multi-asset funds are too similar to their own model portfolios, research indicates.
Natixis Global Asset Management’s latest Portfolio Barometer study analysed 103 risk-rated portfolios from advisers and wealth managers, and found a significant correlation with underlying multi-asset funds.
The study took a detailed look at the “regular” use of multi-asset funds in parent portfolios and found conservative portfolios had an average 11 per cent weighting to multi-asset funds. Moderate portfolios had a 9 per cent weighting and aggressive portfolios had an average of 4 per cent.
Because advisers tend to match funds to model portfolios of a similar risk profile, typical return levels for these funds have been “very similar” to those of their corresponding model portfolios, the research found.
“The marginal benefits of including many of these funds in portfolios has been limited, while simply adding another layer of fees,” Natixis said.
Cautious funds had a correlation of 0.75 with conservative portfolios, according to the study. Moderate funds had a correlation of 0.84 to moderate portfolios, and aggressive funds had a correlation of 0.8 with their model counterparts.
Flexible asset allocation funds were the least like their parent portfolios, with a correlation of 0.68.
James Beaumont, head of Natixis’ portfolio research and consulting group, said advisers appeared to be aware they are replicating their portfolios’ exposure.
He suggested they are waiting for a “better opportunity” to invest in traditional asset classes.
He said: “We are having some people using these funds to try to control volatility.
“It’s a difficult time to be investing. Equities have had a good run and with fixed income you have got duration risk. People worry about the typical 60:40 portfolio of equities and fixed income.”
But Mr Beaumont also warned advisers to “look under the bonnet” of multi-asset funds, because these could still have fixed income risk.
Recent developments have challenged the concept of bonds as an unexciting but reliable vehicle for investors.
The latest figures released by the Investment Association shows fixed income was the worst-selling asset class for the second consecutive month in June, with a net retail outflow of £198m.
This represented the largest outflow since January 2014, when bond funds shed £298m.
A continuation of this trend would see still greater use of asset allocation funds, Mr Beaumont added.
“Fixed income used to be very risk-free. We see fixed income allocation share falling, to the benefit of allocation funds,” he said.
