InvestmentsMar 5 2018

What developments might be in store for multi-asset?

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First State Investments
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Supported by
First State Investments
What developments might be in store for multi-asset?

Multi-asset funds have proliferated across the UK in response to many legislative and economic events but what sort of developments might we see in this field?

Brexit, the US economy, a continued slowdown in China and geopolitical uncertainty all still remain high on the agenda for policy makers and financiers alike over the next few years.

For this reason, contributors to this guide believe multi-asset will still continue to play an important role in providing a risk-managed, diversified means of investing clients' money.

Jonathan Webster-Smith, head of the multi-asset team at Brooks Macdonald, is of this view. 

"Sovereign yields have begun to rise as central banks have started to remove some of the extremely supportive stimulus measures they have had in place since the global financial crisis more than a decade ago.

"However, a number of structural headwinds are holding back inflation and limiting potential growth, particularly in the developed world. 

"As such, we expect the low-return world to persist, which should continue to support multi-asset funds' popularity."

I think multi-asset funds will move to passive exposures, whether exchange-traded funds or smart beta products in order to keep overall costs down and to remain competitive. Ben Willis 

But will the changing market environment - including the rise of crypto currency and financial technology innovation, for example - have any effect on how multi-asset funds are created and managed in the future?

Diversification

According to Frank Potaczek, head of UK proposition for Architas, there will need to be more discussion about how to diversify funds.

He explains: "Traditionally when talking about asset classes, you think equities and bonds, then geographic split, followed by large and small cap.

"In an increasingly connected world, where different geographic markets may also react in a similar fashion, we need to continue to identify further opportunities for diversification."

He says there are various factors the Architas team examines when it comes to identifying and selecting funds, from dividend levels to volatility. These factors can then be used to help diversify the level of risk within portfolios.

This is also a key point for Chris Leyland, deputy chief investment officer for national wealth advisory firm True Potential, who says: "The key development is diversification.

"Having the ability to offer diversification outside of equities and bonds is more and more important as we move through changing market conditions."

Using alternatives may become more popular as a means of additional diversification, Camilla Ritchie, senior investment manager for Seven Investment Management, opines.

She comments: "With bond yields representing poor value, we have been increasingly looking to alternatives as a source for stable returns.

"Combining these provides an array of assets that can deliver characteristics similar to those we traditionally seek from fixed income."

We see risk more broadly as the chance an investor fails to meet their ultimate financial objective. James Dowey

Ms Ritchie adds the issue of low bond yields is a "conundrum" for all asset managers, so she expects the use of alternatives to become a "more pronounced theme" over the next few years.

Andrew Harman, portfolio manager of the First State Diversified Growth fund, says there is an ongoing "evolution" of multi-asset investment to better meet the needs of investors. 

He believes it had grown significantly from the old 60 per cent equities, 40 per cent bonds style, as "more granular allocations were included". He cites these combinations of assets as:

  • Emerging equities.
  • Global equities.
  • Corporate credit.
  • Property.
  • Infrastructure.
  • Foreign currency.
  • Other more bespoke investment strategies.

Mr Harman adds: "Multi-asset, objective-based investing seeks to narrow the distribution of investment outcomes through the flexibility to mix beta (market risk exposure) and alpha​ (investment strategies uncorrelated to equities and bonds), and thereby reduce general market direction dependency."

Short, long and risk

Lukas Daalder, chief investment officer for Robeco, believes more investment houses will look to diversify not just on grounds of asset class or geography, but also on grounds of risk and correlation.

"We are already seeing a number of houses that look towards the macro risk factors, which is still a relatively new field. Additionally, risk parity, whereby one scales risks according to observed volatility, seems to have become more popular as well," he says.

For James Dowey, chief economist and chief investment officer for Neptune Investment Management, the way in which managers allocate based on short-term or long-term risk and investment horizons will also have to become more flexible.

He explains: "We're concerned there is too much emphasis today on dampening clients' short-term volatility. Of course, the ups and downs of the market are stressful, but so too is getting older and not being able to afford to retire because you've been invested in a portfolio that, while having spared you some of the volatility over the years, has also failed to grow.

"In fact, the deeply misguided idea in our industry that risk is simply volatility is at the heart of this. We see risk more broadly as the chance an investor fails to meet their ultimate financial objective. 

"Minimising this risk will likely mean you simply have to accept some volatility along the way."

Accordingly, Mr Dowey sees two major problems for investors, which the industry will have to help with. The first is the tendency to have "excessive allocations to fixed income for long-term investors".

The second, he believes, is the allocation to "opaque and complicated absolute return strategies" that seek to deliver low volatility and uncorrelated returns. 

He points out that approximately 40 per cent of the Investment Association Absolute Return sector has failed to beat cumulative inflation of 4.5 per cent over the past three years.

His comments are not entirely unfounded; the complexity and sheer size of the biggest absolute-return style multi-asset fund, the Standard Life Global Absolute Return Strategy (Gars) fund, has seen investors withdraw more than £10bn from it during 2017.

As reported in FTAdviser, the fund has also lagged its sector in terms of performance over the past three years.

Costs

According to Ben Willis, senior investment manager for Whitechurch Securities, there is still a big question mark hanging over costs and charges.

"Costs are now a key focus for advisers and investors," he comments. "Historically, multi-asset funds have been at the higher end. With the advent of the Markets in Financial Instruments Directive II (Mifid II), and the requirement to display transaction costs on top of the ongoing charge (OCF), some of the costs involved in running these funds will come as a shock.

"In light of that, I think multi-asset funds will move to passive exposures, whether exchange-traded funds or smart beta products in order to keep overall costs down and to remain competitive."

simoney.kyriakou@ft.com