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

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

Multi-asset funds’ relative performance against the passive 60/40 equity/bond benchmark was the weakest, with the active funds delivering a median monthly excess return of -0.11% after charges over the five and a half year period.

Below benchmark performance

The funds fared a little better against their stated benchmarks, but still lagged by 0.04% when measured on the same basis.

‘Likewise, relative to benchmarks reflective of their risk exposure, we found that “go anywhere” funds produced zero excess return over this period,’ Shtekman said. ‘Median alpha was effectively zero for both the style analysis and risk-factor analysis.’

He notes that the overall distribution of alpha for multi-asset funds was wide with a few extreme outliers, but stresses that this does not get away from the fact that the majority of multi-asset funds have produced an alpha of less than 0% on average.

Larry Swedroe, director of research at Buckingham Asset Management, said Vanguard’s findings build on prior research on the subject by Morningstar. This found that between August 2010 and December 2011, just 9 of the 112 tactical asset allocation funds in existence at the time had higher Sharpe ratios than a passive 60/40 equity/bond mix.

Moreover only 14 of the 87 tactical funds in existence since October 2007 posted lower maximum drawdowns during the 2008 financial crisis, spring/summer correction 2010 and the eurozone crisis.

Swedroe said Vanguard switched its $8.6 billion Vanguard Asset Allocation (VAAPX) fund, which was managed by BNY Mellon to a passive strategy in 2011 due to poor performance. 

‘The failure of VAAPX to achieve its objective highlights just how difficult it is for active managers to generate alpha after the expenses of the effort,’ he said.

‘Remember, Vanguard is one of the largest money managers in the world, with tremendous resources at its disposal. In choosing the manager to advise the fund, you can be sure that it employed its deep team of analysts. Yet they failed to find a manager that would generate future alpha.’

It begs the question: what hope is there for the rest of us?

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