Dan Jones  

Newest asset allocators have still to prove their worth

Dan Jones

To adapt a turn of phrase favoured by the now-former prime minister, multi-manager funds were the future once.

They were seen as the answer to the growing demand for a one-stop shop for asset allocation. It didn’t turn out that way: chunky fees, the rise of discretionary fund managers (DFMs) and claims that a more sophisticated approach is now required mean only the biggest players still hold their own nowadays.

In their place came multi-asset products, many of which looked and behaved similarly, albeit often targeting an absolute outcome rather than the traditional relative returns.

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The most popular variant – and the one still taking in big swathes of investor money – is absolute return multi-asset.

These strategies aren’t quite so similar to multi-manager products: they tend to target lower levels of volatility, aren’t usually funds of funds, and – crucially, from a marketing point of view – DFMs feel comfortable buying them for their portfolios.

More recently, it’s not been such plain sailing. Recent performance, amid a tougher time in general for many investors, has started to raise a question or two.

This isn’t just about SLI’s Gars fund: many of its highest profile peers are also finding things difficult. Aviva Investors’ multi-strategy total return portfolio has also started to struggle this year, losing 1 per cent over the past 12 months.

Invesco Perpetual’s Global Targeted Returns fund has done better, returning 3 per cent, yet it too has had a couple of notable drawdowns in its lifetime.

To be fair, not much damage has been done. These funds are still meeting their objectives of eking out returns over a multi-year time horizon.

But there are signs that these products are coming in for the same kind of criticism that dogged multi-manager and other active funds. A report by Willis Towers Watson this summer said diversified growth funds’ fees are too high and the alpha produced too questionable.

At the same time, those multi-managers have been having a better time of it, capitalising on the enduring appetite for equity income and credit funds, and producing stronger returns as a result.

This is more evidence that there’s an opportunity cost to holding lower-risk products – which is why, at Investment Adviser, we’ve always said the real test for the new range of multi-asset strategies is whether they can fulfil their function in tougher times.

These strategies may not be out-and-out insurance policies that are inversely correlated to risk assets. But they should at least offer a fireproof extension to an investor’s regular set-up, and recent evidence isn’t exactly convincing. As things start heating up for traditional asset classes, a few alarms may be starting to ring in other areas, too.