June 27, 2022

Monday Morning Memo: Nowhere to Run – Nowhere to Hide! Are Mixed-Assets Funds in Trouble?

by Detlef Glow.

Within a market environment in which all major equity and bond indices face negative returns year to date, it is somewhat surprising that European investors pulled money out of bond funds while (passive) equity funds are still enjoying estimated net inflows. Given the current economic and geopolitical situation, it is also not surprising that European investors favor mixed-assets, or so-called multi-asset funds, as they expect that these funds might be able to weather the rough market conditions in the same way they did other rough market periods in the past.

But those investors might face a nasty surprise, as the general economic and market environment looks very challenging for the managers of mixed-assets funds. While the managers of mixed-assets funds could rely on decreasing interest rates, which lead to higher prices for the bonds within their portfolios and, therefore, help to reach a positive performance when equities faced a drawdown in the past. It seems to be different this time, though, as the heavily increased inflation forced central banks to stop their quantitative easing programs and increase low interest rates. In addition to this, the spreads of corporate bonds have started to widen as the economic situation puts the earnings expectations for a number of companies and some sectors into jeopardy. As a result, corporate and government bonds face losses, which means that the returns from the bond portion of portfolios won’t help to offset the negative returns from the equity portion of a mixed-assets portfolio.

Graph 1 depicts that with the exception of gold, all major general market segments used by the managers of mixed-assets funds showed a negative performance (in euro) between January 1, 2022, and June 17, 2022 (Note: The indices below are chosen as examples for the general market trend. Indices from other providers may show a different performance pattern but are very likely to follow the same overall trend).

Graph 1: Performance of Indices for Various Asset Classes – January 1 – June 17, 2022 (in EUR)

Are mixed-asset funds in trouble?Source: Refinitiv Lipper

 

European Fund Flows

Generally speaking, it is only a little surprising that mixed-assets products (+€40.0 bn) was the best-selling asset type in Europe over the course of the first five month of 2022. This is because European investors may seek diversification across different asset classes as protection for their portfolios. The category was followed by equity funds (+€20.9 bn), real estate funds (+€5.2 bn), “other” funds (+€204 bn), and commodities funds (+€1.9 bn). On the other side of the table, alternative UCITS funds (-€1.0 bn), bond funds (-€71.4 bn), and money market funds (-€120.4 bn) faced outflows.

Graph 2: Estimated Net Flows by Asset and Product Type – January 1 – May 31, 2022 (in bn EUR)

Source: Refinitiv Lipper

Since this report is focusing on European investors, it is worthwhile to take a closer look at the flows in euro denominated mixed-assets funds which can invest globally. Since these funds offer the investors in general the most diversification, as these funds may have no restrictions with regard to the investment countries and currencies, even as their portfolio base currency is euro.

With Mixed Asset EUR Balanced – Global (+€10.7 bn), Mixed Asset EUR Aggressive – Global (+€5.4 bn), and Mixed Asset EUR Flexible – Global (+€4.6 bn), three of the four peer groups analyzed in this report enjoyed inflows over the course of the first five months of 2022, while Mixed Asset EUR Conservative – Global (-€1.2 bn) faced outflows. By looking at this flow pattern, one could assume that European investors might be aware of the fact that bonds are the main performance driver for conservative mixed-assets funds and therefore avoid these instruments, but this would not explain why funds classified as Mixed Asset EUR Balanced – Global were the third best-selling Lipper Classification overall for the year so far, since these funds can also hold up to 65% of their portfolio in bonds. From my point of view this means that some investors will get a bad surprise when the interest rates increase further.

Graph 3: Estimated Net Flows in Selected Mixed-Assets Lipper Global Classifications – January 1 – May 31, 2022 (in bn EUR)

Source: Refinitiv Lipper

 

Performance Review

With regard to the overall trend in the bond and equity markets, it is no surprise that all four Lipper Global Classifications analyzed in this report show negative returns for the period between January 1, 2022, and May 31, 2022.

Given the general strategic portfolio allocations of the funds in the four Lipper Global Classifications analyzed in this report, it is no surprise that Mixed Asset EUR Conservative – Global (-6.82%) was the peer group with the lowest average losses. The managers of flexible mixed-assets funds showed on average that they were able to maneuver the current storm on securities markets, as Mixed Asset EUR Flexible – Global were the second-best performing peer group (-7.29%) within this report, Mixed Asset EUR Balanced – Global (-7.79%) was the third best performing peer group, while Mixed Asset EUR Aggressive – Global (-9.06%) stood as expected within this market environment at the end of the table.

Graph 4: Performance (in EUR) of Selected Mixed-Assets Lipper Global Classifications – January 1 – May 31, 2022 (in %)

Are mixed-asset funds in trouble?Calculated in EUR

Source: Refinitiv Lipper

Even as all four Lipper Global Classifications showed on average negative returns, there were some funds within every peer group that delivered positive returns for their investors. More generally speaking, it is no surprise that the returns of the funds within the single peer groups are widespread, since the managers are using different tools and techniques to reach their goals. Varying from some rather “old school” approaches, which are purely based on the allocation of bonds and equities, the modern so-called multi-asset funds use also other asset classes such as commodities or precious metals and modern portfolio management techniques, including futures and other derivatives to temporarily leverage or short single markets or specific market segments to boost the performance of their funds.

In more detail, the returns within the classification Mixed Asset EUR Conservative – Global showed the lowest dispersion of returns, as the best fund within this classification returned 10.14% while the worst fund had returns of negative 28.83%. It was followed by Mixed Asset EUR Balanced – Global, where the best fund returned 15.07%, while the worst fund within the classification showed a performance of negative 26.38%. The best fund within the Mixed Asset EUR Flexible – Global classification had a return of 18.17%, while the worst fund had a negative return of 36.97%. As to be expected from the nature of the classification, Mixed Asset EUR Aggressive – Global showed the widest dispersion of returns, as the best fund showed a performance of 27.30% while the worst fund had a performance of negative 37.76%.

It is somewhat interesting to see that the worst fund within the Mixed Asset EUR Balanced – Global classification showed a better performance than the worst fund within the Mixed Asset EUR Conservative classification.

Graph 5: Performance Distribution Within Selected Lipper Global Classifications – January 1 – May 31, 2022 (in %)

Are mixed-asset funds in trouble?Calculated in EUR

Source: Refinitiv Lipper

The wide dispersion of the returns within the different peer groups leads to questions if and how especially the superior returns have been achieved and if we witness the rise of a new “superstar” fund manager.

From a fund selection point of view, the fund analyst needs to understand how these results have been achieved. So, they need to clarify if these results can be attributed to the skills of the fund manager or the credentials of the investment process, or if the superior results were simply luck. In addition, the fund diligence needs to clarify if the respective portfolio management process is robust enough to reproduce such, in some cases exceptionally good, results in different market environments to repeat the current success in the future.

 

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

 

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