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Busting the multi-asset myth: the funds not meeting expectations

by James Phillipps on Feb 19, 2014 at 09:52

Busting the multi-asset myth: the funds not meeting expectations

Multi-asset funds have mushroomed in size over the past five years and while they sound like the perfect ‘go anywhere’ portfolio solution, performance has typically not lived up to the billing.

Analysis of the equivalent US funds market by Vanguard has found that the benefits of actively managed multi-asset funds are a myth with the median vehicle underperforming, net of fees.

Anatoly Shtekman, a senior investment analyst at Vanguard, said that relative to a passive 60% equity/40% bond portfolio, the median monthly excess return was negative and even when compared against the funds’ official benchmark, they still lagged.

But despite this, their popularity remains undiminished. In the US, the number of funds classified by Morningstar as ‘flexible asset allocation’ almost doubled from 61 in January 1998 to 110 as at the end of June 2013, while the assets in these strategies rocketed from $60 billion (£36.55 billion) to $356 billion.

Second best sellers

In the UK, the Investment Management Association (IMA) reported last month that in asset class terms, multi-asset funds were the second best sellers after equity in 2013, seeing net inflows of £4.6 billion compared to £2.8 billion the previous year.

On an individual sector level, Mixed Investment 20-60% Shares attracted £3.1 billion of net inflows, making it the most popular by some margin. And the Targeted Absolute Return sector, which also houses a number of multi-asset funds, including the £19.37 billion Standard Life Investments Global Absolute Return Strategies fund, was the second most bought sector, pulling in £2.2 billion net.

But according to Shtekman, investors’ faith in multi-asset funds is misguided. Of course, comparing different multi-asset strategies is no mean feat and not made any easier by the fact these funds are housed in multiple sectors and employ myriad strategies.

Shtekman sought to offset this by analysing the funds’ performance against a passive 60/40 equity/bond benchmark, the funds’ stated benchmarks, traditional active balanced managed funds and what it deemed more ‘real’ benchmarks using style analysis and factor regression.

‘Regardless of the type of analysis used, we found no excess returns or alpha relative to the stated or implied benchmarks for “go anywhere” funds as a group over the period
1 January, 1998, to 30 June, 2013,’ he said.

‘The majority of these funds underperformed, which contradicts the common assumption that a broader opportunity set translates into a higher likelihood of outperformance.’

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