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.’
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?