With many of the investments historically regarded as being safe-havens – either by dint of their risk profile being perceived as growing exponentially or as a consequence of their returns being regarded as inadequate compensation for that risk – the retail sector was more willing to look at a broader investment universe.
“US long bonds were offering no real return for a long time, and nor were gilts, and the ongoing political problems in the eurozone, together with the lower rates there, prompted investors to look further out to the risk curve, and into different asset classes,” he added.
Even today this low yield in the traditionally popular investments in developed markets persists, with the Barclays 2013 Equity/Gilt Study, for example, projecting that the UK government bonds will deliver a negative 2 per cent real total return each year over the next five years.
As a logical extension of this, then – and of the dearth of time and market expertise that many retail investors have to assess relative returns across the fixed income, equities, currencies, and commodities investment universe – the rising popularity of funds that offered all of these was only to be expected.
Such a change has only been exacerbated by the advent of the RDR, according to Mr Lowcock, with its associated corollary reduction in costs of fund management in general and the greater transparency of reporting that resulted from the review leading to an expansion in the range of strategies being offered to advisers and their clients.
James de Bunsen, fund manager for Henderson Global Investors in London, said: “In the current investment environment, which remains dominated by the vagaries of quantitative easing, particularly in the US, it makes a lot more sense to diversify into a range of assets rather than just one.
“As an adjunct to this it makes more sense to invest in multi-asset funds rather than multi-manager ones, which offer less variety of asset types under one manager’s umbrella,” he added.
All the more so, as, despite the concomitant drop in equities and bond returns for the first few months after the onset of the financial crisis, the more usual marked differentiation between assets’ pricing has returned to the marketplace, according to Peter Fitzgerald, head of multi-asset retail funds at Aviva Investors.
These parallel moves were strengthened by the US’s monthly $85bn bond-buying programme, the Bank of England’s £375bn asset purchasing programme, the Bank of Japan’s wide ranging QE as a part of attaining its two key targets of 2 per cent inflation a year and a 3 per cent nominal GDP rate, and the European Central Bank’s long-term refinancing operations (QE by any other name).
As is to be expected, said Mr Fitzgerald, a heavy equity component in the asset mix of the vast majority of multi-asset funds has been a constant feature of these funds since 2007/08, not just because of the ‘great rotation’ that occurred from fixed income products to equities from that point, but because equities-based funds are an easier sell to the retail sector generally.
“The most popular of this multi-asset fund at the moment tends to have anywhere between a 20 per cent to 80 per cent equities component within a mixed-asset mix, with a weighting skewed more towards the developed markets, especially at the long-end, but we can see this gradually changing.”
Part of the reason for this change, highlighted Mr de Bunsen, is that advisers and their clients have become more used to seeking yield in what were once regarded as ‘riskier’ investments, either by asset type (corporate bonds, notably, for example) or by region (developed markets, emerging markets, and frontier markets), given the relative risk conversion between ‘safe’ and ‘risky’ assets in the financial crisis.
This was particularly in evidence, said Marc Chandler, global head of currency strategy for Brown Brothers Harriman in New York, during the recent period of heightened risk-on/risk-off trading, and persisted to a degree under the recent talk of tapering off fund management environment.
“The most risk-on assets remain equities, with the S&P500 regarded as the most risk-on asset currently, replacing the FTSE 100 from two years ago, with Asia and Latin America swapping places as the most risky of emerging markets over that time,” he said.
“US 10-year government bonds are still generally occupying the least risky position on the correlations matrix, but these correlations have switched often, which means that multi-asset class trading affords an investor the optimal way to minimise risk and maximise rewards.”
Rebalancing, re-weighting, and hedging such a wide array of asset classes, is, he concludes, where the serious money for investors lies, and is key as well to reducing the negative costs of risks myopically perceived.
“For instance, two years ago – despite ongoing problems with the eurozone – French government bonds, and to a lesser degree those of Italy, fell within the safe-haven category, but now, as the recent vicious bailout of Cyprus has reignited fears over a run on eurozone banks, both have shifted markedly into the ‘risk on’ investment profile, as the markets look for the most vulnerable assets to the bloc’s possible contagion,” Mr. Chandler said.
In a similar vein, he concluded, a long US dollar-denominated oil position is still really a relative-value trade between oil and the US dollar. “Oil priced in Australian and Canadian dollars – at least at the moment – is much less risk-on/risk-off dominated and more likely to respond more cleanly to oil-specific fundamentals.”
All of this, though, is a complicated and time-consuming business, so a premium for such multi-asset fund managers can only be expected.
Surprisingly, though, these premiums are not as high as many might expect, said Mr de Bunsen, coming in generally around the +70-80 basis points level over the usual fees for run-of-the-mill fund management operations.
Having said this, Anthony Badaloo, managing director of Church Hill Finance in Hertfordshire, said it is likely, as more multi-asset offerings come into the retail sector, that such fees will diminish further, particularly in funds that utilise a large percentage of offerings through exchange-traded funds.
“Whether through platforms or through multi-asset funds recommended by an IFA, ETFs have been an increasingly popular, easy, and cost-effective way to gain exposure to a range of asset classes, and this trend can only be expected to gather momentum in the coming years.”
Testament to the increasing take-up of ETFs within a multi-asset trading environment was notably evidenced when gold experienced its biggest two-day collapse in around 30 years at the end of April, said James Steel, chief commodities analyst at HSBC in New York.
“The key point here was the disproportionate effect that the selling of relatively small quantities of gold through ETFs by comparison with the market in general had on the precious metals prices, and in this respect, the robust retail investor appetite for gold ETFs has been an important ingredient in gold’s price action since 2004.”
At their height, gold ETFs held the equivalent of around 90 per cent of annual mine supply at the end of 2012, and, although he highlighted that the bulk of ETF investors – including pension funds, and real asset managers – had a ‘buy and hold’ trading strategy it was clear that multi-asset fund liquidation noticeably reduced ETF holdings, by 5m ounces, in fact, over the course of April.
However deleterious for those holding opposite positions, concluded Mr de Bunsen, it is clear that balancing out a portfolio across all the principal asset classes, and on a global basis, affords retail investors the optimal way to minimise risk and maximise reward, and without sufficient resources to do so effectively themselves paying a premium to a successful multi-asset management firm will be money well spent over time.
Simon Watkins is a freelance journalist
Key points:
* Among the retail investment sector multi-asset fund management is increasingly popular.
* It makes more sense to invest in multi-asset funds than multi-manager ones, which offer less variety of asset types under one manager’s umbrella.
* Balancing out a portfolio across all the principal asset classes, and on a global basis, affords retail investors the optimal way to minimise risk and maximise reward.
