December 8, 2014

Monday Morning Memo: Some Facts About Multi-Asset Funds

by Detlef Glow.

REUTERS/Athar Hussain

REUTERS/Athar Hussain

Multi-asset products have been one of the top themes for European investors for nearly two years now. With net sales of €54.3 billion over the first nine months of this year, asset allocation funds have become the best selling asset type for 2014 so far.

As with other parts of the industry the flows within the asset allocation peer group are highly concentrated; the 16 best selling products (out of 2041 funds within the peer group) were able to gather more than €1 billion each, accounting for €30.01 billion or 55% of the overall inflows year to date.

Table 1  Top 25 Asset Allocation Funds by Estimated Net Sales, January 1 to September 30, 2014

Source: Lipper FMI

Source: Lipper FMI

The success of these products has raised some questions by analysts and market observers. Since not all funds will be able to deliver what they have promised to investors, it might be useful to take a closer look at what comprises a multi-asset fund.

As described by the name, a multi-asset fund invests in more than one asset class, i.e., at least in bonds and equities. Since all mutual funds normally also hold some cash, most funds in the mixed-asset segment can be considered multi-asset products. But, since the term multi-asset fund was introduced only recently, investors might be expecting more from these products. Modern multi-asset products invest without any restrictions in bonds, equities, and commodities as well as currencies and in some cases also have the ability to do short trades.

Since the management of a multi-asset portfolio is very complex and requires different skills within different market segments, some fund managers act as managers of managers and split up the different tasks in the portfolio between specialized teams, such as a currency overlay team that manages the currency exposure of the portfolio. Other managers in the team might be responsible for the overall duration of the bond portfolio or do hedges in single markets or segments. Therefore, it is key to achieving the investment target of the fund that the manager has systems in place to monitor the portfolio’s overall exposure and risk.

From my point of view, investors should split the manager risk by choosing more than one manager, i.e., by investing in two or more funds. Even though these kinds of funds are normally highly diversified, investors should make sure the respective managers follow different investment approaches, so the investor’s overall portfolio enjoys the benefits of a diversified range of performance drivers.

With regard to the success of these products in Europe, fund promoters need to ensure their products deliver the returns expected by investors. A negative investor experience could lead to massive outflows from mutual funds, and investors might lose their trust in the industry completely.

The views expressed are the views of the author, not necessarily those of Thomson Reuters.

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