Bond portfolios to lose out to lure of multi-asset
Traditional bond fund providers’ apparent inability to adapt to the era of negative interest rates has been pinpointed as a potential catalyst for a further shift away from their products and into multi-asset portfolios.
Research by Goldman Sachs, analysing the sustained decline in global bond yields in recent years, has found one in four corporate bond funds in Europe now have yields that amount to less than their annual charges.
The bank said typical charges for new launches have fallen by just two basis points over the past five years, suggesting “asset managers have not yet responded to the lower yield environment”.
Goldman implied this dynamic may have already accelerated a move into multi-asset portfolios, particularly given that its research indicated an increased preference for low-volatility returns among multi-asset investors.
It added: “79 per cent of multi-asset assets under management in the UK are currently invested in funds with medium or high equity components. The dominance of these higher-volatility multi-asset funds is eroding rapidly, however.
“Retail investors appear to prefer...funds generating ‘bondlike’ returns, despite the fact that they generate lower absolute returns.”
Many fund buyers have already shifted into riskier areas of the bond market in a bid to generate yield, but Goldman emphasised investors still had a need for returns akin to those formerly offered by traditional fixed income portfolios.
Rory McPherson, head of investment strategy at Psigma, said: “You have got yields of below 1 per cent or thereabouts and then you have got the total expense ratio to think about, so it’s quite hard to make money.”
Axa Wealth head of investing Adrian Lowcock added: “I would not be surprised to see multi-asset grow in that space, particularly in the area of alternative assets.”
But he cautioned: “It’s hard to get something bond-like to replace a bond investment.”
One bond-like fund Mr McPherson owns is the Absolute Insight fund. He said: “That’s a steady Eddie offering. They have very tight trading bands around their return generators. They are one that we like.”
Goldman claimed a shift to multi-asset could be aided by last year’s pension reforms. It estimated about £6.9bn in annuity purchases has been “foregone” since the introduction of pension freedoms, a figure equivalent to one quarter of total net fund sales in the UK in 2014.
The bank’s analysts added: “We see the greatest pressures falling on asset managers that hold a large proportion of their assets under management in fixed income, particularly those with large retail investor bases.”
“We expect these pressures to manifest themselves in both flow and pricing pressures. Investment grade corporate bond funds are likely to see an acceleration in pricing pressures, as the compression in yields over recent years increases the focus of investors on fund expenses.”
