How multi-managers asset allocate

Investment styles also tended to come in and out of fashion, but in a way that was broadly foreseeable. 

Value funds tended to perform best when the economy is growing robustly and inflation is on the rise, while growth funds tend to perform best when economic growth is muted and inflation is low.

Bonds tend to perform best when economic growth is uncertain and investors are attracted by fixed income and higher levels of certainty. 

The challenge for fund pickers over the past decade has been that bond prices have persistently hit new highs, while the economy has been strong enough for growth funds to perform well, the momentum has not been there for the typical switch from growth to value to take place.

Darius McDermott, who runs a range of multi-manager funds at Chelsea Financial Services says the rise in bond prices, and therefore the collapse in yields, means the traditional approach to multi-asset investing has broken down. 

He has replaced much of the government bond exposure in the portfolios for which he is responsible with alternative assets that pay an income. 

For Rob Burdett, multi-manager fund manager at BMO, asset allocation is a key question.

He particularly focuses on having value funds in the portfolio right now, as he believes those assets are cheap relative to growth funds.   

He added that his funds have allocations to assets which are not correlated, such as caravan parks. 

John Moore, senior investment manager at Brewin Dolphin says that with traditional asset allocation having broken down, this is a particular challenge for multi-manager funds which are a traditional investment product.

He says the products which survive will be those that are more flexible in their approach to asset allocation. 

Craig Baker, the fund manager at Willis Towers Watson responsible for running the Alliance investment trust multi-manager portfolio, says that trying to time the market and move between asset classes is “notoriously difficult” and that in the current climate where unprecedented monetary and fiscal policies are being deployed, the task has become even more difficult. 

With this in mind, he says he prefers to allow fund managers to run their money in a way that is not constrained by investment style or by Mr Baker’s own world view. 

He says: “We believe that the best way to maximise long-term returns is to give skilled managers unconstrained mandates and to let them focus on just their best investment ideas.

"While this provides higher long-term expected returns, such portfolios can be too volatile for most investors to be comfortable with and so a multi-manager portfolio can provide access to these high conviction strategies but reduce the associated volatility.”

Flexible friends 

Mr Baker added that he tries to mitigate this extra volatility by choosing up to ten different managers, all of whom are likely to see the world differently, and so reduce volatility. 

But Rob Morgan, pension and investment analyst at Charles Stanley, believes that being willing to deviate from the traditional market weightings when creating a portfolio is crucial.

He says: “Look at the differential in performance of the US market versus Japan or Europe over the past decade.

"If you have a fixed asset allocation then that can be a serious disadvantage. It means you’d be closer to benchmark potentially, and there is no guarantee that your manager makes the right macro calls, but returns will be dictated more by asset allocation than stock or manager selection.

"That’s been the case in the past and there’s no reason to expect it to be different going forward. From this point we can no longer rely on every cycle producing a new high in every major stock market and we have to keep under constant review the extent of a market's potential for growth.” 

James McDaid says another challenge for asset allocators in the current climate is that not only are policymakers' responses to the crisis unprecedented in nature, the timing of when those policies might end is unknown.

He believes this makes it risky to try to make investments based on buying the asset classes that perform well in periods when policies such as quantitative easing are in force. 

Growth pains? 

The US is a classic growth market, and has benefited from low interest rates and quantitative easing keeping bond yields low. 

Lower bond yields help growth companies as growth companies tend to pay little or nothing in terms of dividends.

If bond yields are rising then investors buy the bonds to get the income, and sell the equities, but with bond yields at close to, or below, zero, the meagre income offered by growth companies looks relatively more attractive.

Low bond yields also tend to mean that the outlook for economic growth and inflation is uncertain, so investors are wary of value stocks, which are more cyclical in nature.   

James Davies, investment manager at Close Brothers Asset Management says: “For us, we use a strategic asset allocation to establish the broad parameters of our funds.

"The science part is based on the long term performance of different asset classes, and we then arrive at a more tactical allocation around this based on inputs from a variety of sources ranging from macro-economic data and research, conversation with fund managers, and importantly our own internal investment discussions with the wider Close Brothers Asset Management team.

"The advantage of using active funds is that we are not solely dependent on traditional asset allocation to generate returns, as the alpha from our fund managers has the potential to generate long term performance.

"Furthermore, when it comes to asset allocation we can be as granular as we like by using managers who are exposed to sectors in the market where the returns are being generated.

"A great example of this recently is where we have flexed our funds more towards growth managers, and away from the value end of the market – thus generating our own alpha you might say.”