Multi-assetNov 21 2019

Do multi-asset funds perform in times of stress?

Supported by
HSBC Global Asset Management
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Supported by
HSBC Global Asset Management
Do multi-asset funds perform in times of stress?

UK equities and bond markets have not been stress tested too much of late, in part due to a long-running bull market in both asset classes.

But investors may want to know that should UK equity and bond markets come under some stress, whether that is localised or part of a wider global downturn, that their investments are not likely to suffer.

UK investors have long had a bias to domestic stocks and bonds in their portfolios.

Laura Suter, personal finance analyst at AJ Bell, explains: “This is partly because we all like to invest in familiar things that we understand, such as the brands you use every day, or the shops you see the logos of on the high street.

“However, you want to make sure that you don’t have too much of your money in one market. It means that if the UK suffered a stumble, you might be disproportionately hit.”

She adds: “In recent months, UK investors have been shedding some of their home bias though, and investing more globally.”

Brexit uncertainty has been weighing on UK equities in particular recently, which has resulted in outflows from many UK equity funds and inflows into multi-asset funds instead.

Figures from the Investment Association show that in September, mixed asset was the best-selling asset class with £845m in net retail sales. It recorded net retail outflows of £676m from UK equity funds during the month.

Wide ranging

Meike Bliebenicht, senior product specialist for multi-asset at HSBC Global Asset Management, says it is not a strong enough investment rationale to hold increased allocations to UK asset classes.

“There is no guarantee that your home market will outperform others, just because that’s where you happen to live,” she adds.

Ms Suter explains: “If you’re just invested in the UK, you will see your portfolio move up and down at the same time, with no balance between assets that outperform and underperform at different times.

“It means that, at times, you could see your entire portfolio fall significantly at the same time, meaning that if you need to make a withdrawal you’d have to lock in a loss.

“Instead, you should spread your assets between different markets, asset classes and size of companies, so incorporating equities, bonds, cash, and some diversifiers, such as gold, property or infrastructure.

"As well as hopefully delivering a higher return over time, you will also see a less bumpy ride along the way.”

She adds that, over the past one, three and five years the FTSE 100 and FTSE All-Share markets have been the worst performers, when compared to the US’s S&P 500, the MSCI World and the MSCI Emerging Markets indices.

Over five years the FTSE 100 returned 35.4 per cent, while the S&P 500 delivered 86 per cent, according to Ms Suter.

Patrick Connolly, chartered financial planner at Chase de Vere, says in an ideal world, investors want to invest in a range of assets which will each reward them in the long-term, but where they do not all fall in value at the same time.

“Multi-asset funds can achieve this,” he says.

“They can provide investors with an all-in-one diversified portfolio, which is managed by an investment expert (or team) who is responsible for monitoring the underlying assets and making changes if they believe this will improve performance or manage risks better.”

Under stress

Multi-asset funds may help to spread risk, but do they outperform UK equity and UK bond funds when the going gets tough?

Ms Bliebenicht explains that the last decade has brought a “distinct advantage” for global investors, with UK equity performance “substantially behind” the global developed market universe.

According to Ms Bliebenicht, the MSCI UK index was up 93.5 per cent, from December 31 2009 to October 29 2019, compared to the MSCI World index’s 208.5 per cent rise over the period.

She adds: “Over the short term, correlations between equities and government bonds may increase in periods of market stress. The ‘taper tantrum’ in the second quarter of 2014 was an example of such a perfect storm, as was the start of 2018.

“Over the medium to long term there is a clear benefit from diversification, especially if we consider a globally diversified portfolio against holding UK assets on their own.”

Mr Connolly says there can still be significant differences between the performance of different multi-asset funds depending on the mix of underlying assets they hold, the investment style, charges and “whether their managers make good or bad decisions”.

He says: “This is evidenced in that the top-performing multi-asset fund has returned 19.6 per cent over the past year, whereas the worst performer has lost 6.4 per cent.”

Type of market stress might also affect whether a multi-asset fund outperforms a UK equity or UK bond fund.

Ben Yearsley, investment consultant at Fairview Investing, says: “It really depends whether it’s a wide economic stress, such as a broad recession, or just a price-related equity market stress situation.

“In a recessionary environment it’s likely that equities, commodities and property will all suffer – even some corporate bonds too, with really only government bonds providing solace.”

He says: “I also think that over the very long term – 10 years plus – that equities will outperform. So multi-asset over the very long term will underperform.

"Therefore you are investing in it for either a shorter timeframe or for risk diversification reasons – both of these are valid reasons.”