May 20, 2019

Monday Morning Memo: Multi-Asset is Dead – Long Live Multi-Asset!

by Detlef Glow.

Multi-asset funds have been a hot topic for European investors since the aftermath of the 2008 financial crisis because there were some funds that showed very limited losses despite the rough market environment. Investor interest reached even higher after the euro crisis in 2011 as a number of funds continued to show quite a stable performance pattern.

Graph 1: Net Flows in Multi-Asset Funds (in bn EUR)

Net flows in multi-asset-funds

Source: Lipper from Refinitiv

As multi-asset funds were the best-selling asset type in Europe overall for 2017, some market observers predicted investor interested peaked that year and may not return to those levels in the foreseeable future. Despite this, even as the overall mutual fund industry in Europe faced outflows over the course of 2018, multi-asset funds were able to gather net inflows. Nevertheless, a number of funds were not able to handle the market conditions over the fourth quarter of 2018. The sluggish performance of those funds disappointed investors and, therefore, they experienced net outflows in Q4. Even as the overall negative trend for net flows (including multi-asset funds) continued, some fund promoters still enjoyed significant inflows.

Graph 2: 20 Best Selling Promoter of Multi-Asset Funds 

Best selling fund promoter of multi-asset funds Q1-2019

Source: Lipper from Refinitiv

While multi-asset funds faced outflows of €16.1 bn over the course of Q1 2019, the 20 best-selling promoters were able to gather €5.2 bn in their multi-asset funds. These flow numbers show that fund promoters can gather net inflows, even in an overall negative market environment, if they offer products which satisfy the needs of investors.

The high demand of investors led, in combination with a positive market performance, to increasing assets under management. With regard to this, it is not surprising that the assets under management of multi-asset funds registered for sales in Europe hit a high of €1.7 tr at the end of Q1 2019, which equals a market share of 17.05% of the overall assets under management in the European fund industry.

Graph 3: Assets Under Management in Multi-Asset Funds in Europe (in bn EUR)

Assets under management in multi-asset funds

Source: Lipper from Refinitiv

Given the fact that a number of investors are not willing, or allowed, to invest directly in the stock markets and/or demand returns that are considerably higher than the returns from the bond markets, one doesn’t need to be a market wizard to predict that the assets in multi-asset funds will increase further, as multi-asset funds are the product type of choice for these investors.

In addition, the increasing demand from regulators in Europe regarding financial advice could lead to more demand for multi-asset products, as these might be the most suitable product type for retail investors.

The continuing trend toward multi-asset funds is also visible in the corporate activity of asset managers since there were 7,889 multi-asset funds launched from January 1, 2008 to March 31, 2019. At the same time, we witnessed 6,046 fund liquidations and mergers. As a result, there was a net increase of 1,843 products for the multi-asset fund sector. These numbers wouldn’t be very impressive given the overall number of funds in Europe, but since the overall number of funds in Europe was decreasing (counted by ISINs available for investors), the increase in the number of multi-asset funds was the opposite of the general trend in the European market. We did, however, witness decreasing numbers for multi-asset funds within this period—in 2009, 2014 and 2016. From my point of view, these drawbacks were driven by strategic decisions of the respective fund promoters, as some of them liquidated unprofitable funds or merged old mixed-asset products with newly launched multi-asset products with a broader investment objective than the old ones.

Graph 4: Number of Net Launches of Multi-Asset Funds

Overview multi-asset fund launches

Source: Lipper from Refinitiv

These new products will open up new opportunities to the respective portfolio managers, as they have less restrictions with regard to single asset class allocations, as well as to the use of derivatives to leverage and/or short positions in the portfolio.

As mentioned above, I strongly believe that multi-asset products will continue to rise in Europe, even as some market observers state they believe these products have peaked in investor demand and won’t be as successful in the future as they were in the past. In addition, the trend toward passive products is often stated as a showstopper for actively managed funds, but from my point of view this is not true for multi-asset funds, as these products have a unique selling point which meets the demand of investors who might not use ETFs or index trackers at all.

I think that it is important for the managers of multi-asset funds to be as active as possible with regard to their management decisions and the respective allocations toward single asset classes. This will be the key to success in rough market conditions, as proven by a number of portfolio managers in the past. Therefore, investors need to analyze the management approach and resulting performance of a multi-asset fund very carefully to separate the wheat from the chaff.

The views expressed are the views of the author, not necessarily those of Lipper or Refinitiv.

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