From a product perspective, the chief beneficiary has been multi-asset funds, a sector that has long been used to sky-high popularity.
Demand for single-asset products, such as equity and bond funds, has waxed and waned at various points in the past decade, despite the strong returns from both in an era of loose monetary policy. But the appetite for multi-asset has never really shown any signs of wavering: mixed-asset products have registered net inflows every year from 2008 to the end of 2017, according to Investment Association (IA) data.
Fund firms have been prolific in responding to this fresh source of demand, with 152 funds launching within the relevant IA and Association of Investment Companies (AIC) mixed-asset sectors since May 2014.
But which have been the best performers among this group? And do such launches adequately cater to the needs of the pension freedoms market?
A clear selling point for multi-asset is the promise of diversification, and the protection it can offer investors. This, and the possibility of generating income, make the funds an appealing area for those who can more easily access retirement savings under the reforms first announced by then-chancellor George Osborne in April 2014.
Rob Kelly, senior consultant within the Emea insights team at Broadridge Financial Solutions, which carries out research on the space, says: “Multi-asset income has grown from about £12.5bn at the start of 2014 to £22bn at the end of 2017. The funds with most flows are the ones launched since the announcement of the pension freedoms. Overwhelmingly, the flows have favoured those that launched after this date, and which we theorise might be targeting the retirement income market.”
“With pension freedoms coming [into effect], multi-asset on a broad level is naturally suited for retirees. We have people with medium to small pots, and multi-asset is a relatively cheap way to diversify, while allowing them to take an income.”
Chris Chancellor, partner at consultancy Mackay Williams, says this rise in popularity may have come at the expense of an old favourite: “In the multi-asset space, the focus for a lot of groups has been income. This fits with the pension freedoms, but also ageing demographics. An interesting comparison is with UK equity income, which has seen outflows for a number of years when many thought it would gather assets.
“A lot of these potential sales instead went to mixed assets, with their ‘all-weather’ message and lower risk. I think investors generally have still not forgotten the financial crisis and the risk of equities.”
Sales figures appear to back this up: Chart 1 shows the two least popular sectors over the past 12 months have been Mixed Investment 0-35% Shares, which has the lowest maximum equity exposure, and Flexible Investment, where no minimum or maximum requirements apply. As such, it appears that risk profiles, alongside other needs, are helping drive individuals into moderately cautious and medium-risk funds. This suggests investors want better returns and income than are on offer from bonds, but feel squeamish about equity-like volatility.
As this implies, multi-asset funds can vary significantly in their approach, which means satisfying specific needs is not always straightforward. For example, although new multi-asset products are widely assumed to be aimed at investors in or approaching the decumulation phase, many do not provide a suitable level of yield.
In an effort to enable advisers to better assess the new offerings, Money Management has analysed funds launched since May 2014 with a track record of at least two years. We have looked at those which have delivered the strongest total returns, but also separately identified those with the largest yields, as outlined in Table 1.
There are some exclusions: the Volatility Managed sector has been left out of the analysis because it consists of risk-rated fund ranges, meaning many disparate offerings are ranked together. Money Management carried out an assessment of performance within this group, using Morningstar categories for clarity, in our February 2018 issue. On top of this, three members of the AIC’s Flexible Investment peer group have launched since May 2014, but these lacked the two-year track record required in the analysis.
Because of its unconstrained nature, the Flexible Investment group appears to offer the best choices in terms of both growth and income. Zurich Horizon Multi-Asset V returned £1,417 from a lump sum investment of £1,000, beating all other new multi-asset offerings during the period. Given that equity markets have continued to prosper over this timeframe, the success of this fund – and Zurich Horizon Multi-Asset IV, which tops the Mixed Investment 40-85% Shares group – can be attributed to their significant weightings to the asset class. However, both funds are only available through Zurich’s intermediary platform.
In terms of income, Newton Multi-Asset Income is the most notable, topping the Flexible sector with a 3.9 per cent yield.
However, retirement needs are far from simple to meet. Intermediaries should remember that in the current low-yield environment, finding a fund that pays a sustainable income is no easy task.
For example, Royal London Asset Management’s GMAP range, run by Trevor Greetham, has a notable presence in the table. In the Mixed Investment 40-85% Shares group, the Adventurous fund from this franchise makes the cut, both in terms of growth and income, though its presence in the latter section partially reflects the low levels of yield on offer from new products in that peer group.
Absolute return funds tend not to target income payouts, and as a result do not disclose yields. From a growth perspective, the best-performing multi-asset product in this space was Pictet’s Multi Asset Portfolio, which seeks to provide equity-like returns with less than 75 per cent of global stockmarket volatility.
Incomes and outcomes
Launches have been most prolific in this sector, with 39 funds debuting in the years following Mr Osborne’s announcement. This sector does not exclusively consist of multi-asset funds, nor are all its products targeted at the pension freedoms demographic. But many of these vehicles appeal to investors because of their focus on capital preservation.
Demand for this has been indicated by the proliferation of funds which, mimicking the approach of Standard Life Investments’ Global Absolute Return Strategies (Gars) offering, hedge positions against each other, with a return target often benchmarked against metrics such as inflation. Some also target specific levels of volatility.
“We are seeing quite a few Gars-type strategies,” notes Rory Maguire, managing director at ratings agency Fundhouse. “It’s the nirvana strategy: high returns with low volatility. On paper, who wouldn’t want such a thing? The reality, of course, is often quite different.”
These funds have come under fire for various reasons. Some have questioned whether absolute return products really can protect capital in difficult market conditions, while others – including the FCA – have criticised a lack of transparency in some products’ fee structures.
Mr Maguire says the problems with this sector can be extended to new multi-asset funds in general. “Innovation is often a way of playing hide the ball or reinventing something that already exists, but presenting it in a more sexy way,” he says.
“We see this with the array of multi-asset funds in the market. Many seem to promise a cake-and-eat-it outcome, like high returns with little downside, or an income of 5 per cent and little downside risk. Over time, clients would have been better off in simple, old school balanced funds.”
Plenty of advisers appear to agree. Asked about product innovation in relation to pension freedoms, Mr Kelly points to “target-date” offerings – portfolios whose asset allocation becomes more cautious as that date draws near. But he acknowledges demand for these strategies has been lukewarm.
“I think it’s fair to say target-date funds haven’t picked up huge momentum, but managers are still looking at this and trying to build on the US story [where these products are more popular],” he says.
Mr Norwood suggests product innovation will be a case of gradual evolution, driven by multi-asset funds confronting the challenge of producing a sustainable income.
“Some likely developments include the increased use of alternative asset classes to try and obtain greater yield, such as emerging market debt and infrastructure,” he says.
“[You could also see] more funds selling options in order to boost income, and greater use of passive investing in order to lower costs.”
While those like Mr Maguire say more complexity is unnecessary, it is clear many investment managers are thinking more about how to diversify portfolios. Investors have long been concerned about high valuations on stocks, and whether the advent of monetary tightening, among other factors, dampen risk appetite. This would hit multi-asset funds with high equity allocations, though diversification may offset this somewhat.
But it should be noted that fixed income – another key component for many multi-asset products – also looks vulnerable, particularly as central banks tighten policy.
“The next decade could be about the risk in bonds if interest rates steadily creep upwards,” notes Mr Chancellor.
As the pension freedoms bed in, it is likely that more new products will enter the multi-asset marketplace. Similarly, existing offerings will evolve in response to the new regime: some, such as the Old Mutual Generation funds, have already been ‘revamped’ in response to the freedoms.
But with a great deal of variety now on offer, and market volatility set to test these new products in the not-too-distant future, intermediaries may need to look again at their existing options to ensure they are fit for the future.