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March 6, 2016

Monday Morning Memo: Multi-Asset Funds–Trouble ahead for the blockbuster products?

by Detlef Glow.

In terms of the estimated net sales for 2015, mixed-asset funds were—for the first time since Lipper has run this statistic—the best selling asset type in Europe. As was to be expected, this led to an increase in the assets under management of mixed-asset products registered for sale in Europe, up from €1,150.2 billion to €1,360.2 billion over the course of the year. This increase of €210.0 billion was driven mainly by the performance of the funds, which contributed €114.5 billion, while net sales contributed €95.5 billion to the overall growth in the assets under management. With regard to the fund flow pattern for 2015 it was surprising that only two of ten largest products by assets under management were among the ten best selling mixed-asset funds in Europe.

Why are mixed-asset products so popular with European investors at the moment?

One reason for the popularity of mixed-/multi-asset products is definitely the market environment. High volatility in the stock markets and the low-interest-rate environment force investors to search for new sources of return—having a rather balanced or defensive risk/return profile—that suit their needs.

Does the chase for yield impact the fund selection process?

If the fund selection process were focused on returns only, European investors would buy the funds that have the best results over a given period. To find some evidence of the factors that impact the fund selection process in the mixed-asset segment, Lipper has compiled a five-year analysis that includes all primary share classes registered for sale in at least one European country. If the performance of the fund is the driver for the buy decision, all top-selling funds should be at the top of the performance table.

Looking at the performance from January 1, 2011, to December 31, 2015, it is quite surprising to see only one of the ten best selling funds in the mixed-asset category (at Number 78) in the hundred best performing funds over this period. In other words, it seems to be that performance is not the driver behind the—in some cases—exceptionally high inflows into these funds.

Is realized risk the main criterion for fund selectors?

Since realized risk is an important criterion for a fund selector looking for a fund that suits a given portfolio, it is worthwhile to analyze how the best selling funds are positioned with regard to maximum drawdown. We analyzed the maximum drawdown over the five-year period from January 1, 2011, to December 31, 2015. The analysis of this measure shows risk, at least measured by maximum drawdown, is also not the main driver of flows, since the fund from the list of the ten best selling mixed-asset funds with the lowest maximum drawdown placed at Number 263; i.e., 262 funds had a lower maximum drawdown over the period.

The comparisons above only show that investor decisions are not driven mainly by returns (greed) or by fear; the comparisons don’t explain why investors buy these funds especially. To find out more about the reasons, one needs to split up the funds into their respective peer groups, since that enables an apple-to-apples comparison. Educated investors would do that anyway, especially if they take their individual risk profile into account. Such a comparison shows that some of the best selling mixed-/multi-asset funds were able to generate track records with an above average risk/return profile, according to the Lipper Leaders for Consistent Return measure. But what if in other cases there are some top-selling funds that are not in the top spot in their respective peer groups either? This raises the question of why investors do buy these funds.

Other factors that may drive fund selection decisions

From my point of view some fund promoters do an exceptional job of marketing their funds to investors. That is, the promoters are willing and able to explain their investment philosophy and their investment approach in detail to investors so they can make an educated decision as to whether the product fits their needs.

But this may cause some trouble for investors and fund managers in the future. Even though some funds faced and obviously survived the euro-crisis of 2011, a number of these funds weren’t launched before 2008. That means the fund managers haven’t faced a global crisis in the financial markets and therefore can’t prove if and how their investment approach and risk management system would work in this kind of environment. Investors would need to trust the described process and hope the fund manager can deliver the expected results.

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

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