Morningstar’s Jeremy Beckwith has said short track records and the difficulty of separating luck from skill are creating issues within multi-asset fund selection.
The director of manager research at the data provider said the growing number of multi-asset vehicles in the UK had not yet translated into a significant number of positive Morningstar ratings. This was in part due to the nature of the products, he suggested.
He contrasted the investment process of a multi-asset fund with that of a typical equity or bond fund and said changes in the former were often much harder to attribute.
“Whereas an equity fund will hold 50-60 stocks, and change 10 a year, multi-asset funds will typically employ top-down, asset-allocation strategies that involve two to three changes per year,” the manager said.
“[Also,] asset allocation is often a little binary, which means distinguishing between luck and skill can be difficult.”
Mr Beckwith noted that no multi-asset fund currently held a gold rating from Morningstar, though some long-standing products held silver and bronze.
Though classified as an absolute return vehicle, Standard Life Investments’ Global Absolute Return Strategies is a similar product which does hold a bronze rating.
Morningstar said in August it was “keeping a close eye” on Gars because of signs that its size, at more than £40bn, was inhibiting its ability to add alpha in its stock selection.
Mr Beckwith said with more conventional multi-asset funds, the issue often boiled down to a lack of distinguishing features.
“It is not that straightforward to distinguish between individual products, let alone between luck and skill,” he said.
A further obstacle came from the fact that many such portfolios had only been in existence for five years or less, he added.
It is not just the products that are unproven, Mr Beckwith noted.
Many managers from a range of asset classes have established themselves in a post-crisis bull market, which has continued virtually unhindered in the past six years.
“We have been straight up since 2009 [in the US and the UK]; that is almost seven years of a one-way market,” he said.
This market strength has obliged fund selectors to take a closer look at short-term drawdowns for signs of how managers are able to cope.
Mr Beckwith said: “[The bull market] has forced us to do that, but it is not as reliable an indicator as an 18- or 24-month bear market. Managers being obliged to sit and look at positions losing money is a good test [of their skills].”
Being able to avoid the worst of the market falls is of particular importance to funds designed to appeal to pension savers.
Low volatility was more vital than income for those in the decumulation phase, Mr Beckwith argued.
“What you want is low volatility. It often doesn’t matter whether you’re taking income or capital, because the capital gains tax-free allowance [can trump income].”
He warned the income-focused, multi-asset portfolios increasingly being launched with pension savers in mind faced another headwind due to the ongoing search for yield across all asset classes.
“Income is not low risk any more and if you want yield you have to go into quite risky assets,” he said.
“As a result I think correlations between underlying investments are probably higher for [multi-asset income vehicles] than for standard multi-asset funds.”
