Multi-assetNov 16 2022

Uncertainty for multi-asset funds as market turmoil continues

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Uncertainty for multi-asset funds as market turmoil continues
(Pexels/Alphatradezone)

Multi-asset funds have seen net inflows in the year-to-date with investors keen to outsource asset allocation decisions, however there could be clouds on the horizon for the vehicles, experts have warned.

Some £3.7bn was invested into multi-asset funds between January and September this year, according to data from Morningstar.

Some fund managers have seen more interest in the funds as confusion over asset allocation increases.

The future of the 60/40 model, where 60 per cent of a portfolio is invested in equities and the remaining 40 per cent in bonds, has come under renewed scrutiny in the past year.

Things are quite complicated out there at the momentGeorgina Taylor, Invesco

In “normal” market conditions, stocks and bonds should act to hedge one-another, as when the stock market experiences a rout, money will move into bond markets and increase prices causing yields to drop, and vice versa.

However, since the start of the year both bonds and stocks have seen bruising performances, with fears of an incoming recession hitting stock markets, while bond markets are digesting unprecedented rises in interest rates.

Georgina Taylor, head of multi-asset at Invesco, said this pressure will have tempted investors to move from managing their own portfolios, and into multi-asset funds.

“Things are quite complicated out there at the moment, so outsourcing that [asset allocation] decision feels a good thing to do [for investors].”

Indeed, the flexible investment sector was the most purchased investment company sector on adviser platforms in the third quarter of the year.

Data released by ISS Financial Clarity and the Association of Investment Companies showed flexible investment trusts accounted for 18 per cent of purchases between July and September.

Platform purchases for the third quarter, totalling £334mn, were 7 per cent lower than the previous quarter.

Most popular investment company sector on adviser platforms

Rank in Q3

AIC sector

% of purchases

(Q3 2022)

% of purchases (Q2 2022)

1

Flexible Investment

18%

17%

2

Global

10%

13%

3

Infrastructure

10%

5%

4

UK Smaller Companies

8%

7%

5

Property – UK Commercial

7%

6%

Source: AIC

The data shows that in times of trouble, financial advisers and wealth managers are turning to “flexible friends”, said Nick Britton, head of intermediary communications at the AIC.

“This has driven relatively resilient demand for investment companies in the third quarter of the year, in contrast to the broader decline in platform purchases overall.”

However, the sector is difficult to analyse mainly due to its breadth which covers a range of risk offerings, as well as pension funds investing across the sector and making up a large proportion of total investment.

For the purpose of analysis, it is difficult to “slice and dice” the sector, said Ben Seager-Scott, head of multi-asset funds at Evelyn Partners.

“There are different flavours of multi-asset, and [understanding the sentiment] depends on the specific funds.”

The case against multi-asset funds

Market headwinds will be causing certain behaviour among retail investors, said Seager-Scott.

“Market sentiment is broadly negative, and when it is, a lot of investors get spooked and, perhaps for the wrong reasons they try to time the market," he said.

“Investors who have been invested in a balanced or high risk fund may well take their money out."

Another theme impacting the sector over the long term is the move away from multi-asset funds into managed portfolio services.

Seager-Scott said he is seeing a renewed drive towards MPS, with a recent survey showing wealth managers expect to use the vehicles more extensively over the next two years.

“If you were to move someone out of a multi asset fund into an MPS, that would show up as an outflow in MA funds, but it wouldn’t reflect the fact that you’re effectively in a multi asset MPS.”

The future for multi-asset

Looking ahead, dark clouds could be on the horizon for the sector for two reasons.

Firstly, UK pension funds will have sold a significant degree of their exposure to multi-asset funds during the LDI debacle last month as the "mini" Budget’s impact on yields forced them to sell liquid assets to shore up derivatives positions.

The impact on the multi-asset sector as a result of this is still unclear.

It will be interesting to see what happens in the new yearGeorgina Taylor, Invesco

Secondly, for multi-asset funds who have held global equities and have not hedged their currency, they had had a massive uplift in returns from the strong dollar.

Although investors are buying US funds with pounds, the funds will have seen a boost in the relative value of the funds' investments.

By way of an illustration, the IA’s North America sector has lost 17.41 per cent in the year-to-date to November 11, according to FE Fundinfo, however the strength of the dollar will have artificially inflated the value of the underlying assets in comparison to the pound. 

The equivalent return for the same sector in pounds is a loss of 5.08 per cent, giving UK investors around a 22 percentage point advantage.

Taylor said a lot of multi-asset funds invested in global equities who haven’t hedged their exposure will have seen a “massive uplift” from the positive dollar move.

“It will be interesting [to see what happens] in the new year, because those asset managers may have been bailed out by those currency moves.”

She said she expects a renewed analysis of asset allocation.

“What do you do about that from here…that is a different investment decision.”

sally.hickey@ft.com