Finding the right fit for multi-asset funds

Are multi-asset funds the next big thing, déjà vu – or perhaps a bit of both? Janine Mace reports.

It’s always tough being the new kid on the block. 

But it’s even tougher when nobody knows what to call you and everyone expects you to prove yourself but is reluctant to give you a chance.

Just ask the fund managers responsible for Australia’s new breed of multi-asset funds – or is that real return funds, goal-based funds or objectives-based funds?

Schroders’ head of fixed interest and multi-asset Simon Doyle is the first to admit it’s tough marketing a new product when no one agrees on what to call it, or what product category to put it in.

“The challenge is that this industry operates on boxes. So you need to fit into one of them,” he says.

Lonsec senior investment analyst – managed funds, Deanne Fuller, agrees the uncertain nomenclature is making life difficult for these new products, with some ratings agencies currently lumping multi-asset funds into their ‘alternatives’ category. (Lonsec currently rates multi-asset funds offered by Schroders, AMP Capital, Select and MLC.)

“They don’t fit into the nice neat boxes we have created as an industry for funds,” she admits.

“We tried calling them things like total objective funds and real return funds, but we are still trying to find the right name. We will probably settle on something by the end of the year.”

Another problem is how these funds sound a little like the ideas behind the 1980s version of single manager diversified funds, where one manager was responsible for investing across all the asset classes.

Fuller agrees the new generation of multi-asset funds resemble this early incarnation of diversified funds. “It is funny how it goes in circles,” she says.

The similarities have slowed acceptance of the multi-asset fund concept, according to Aberdeen Asset Management’s senior investment specialist Leanne Bradley. “That is why the market has not embraced these funds as quickly as you would think they would.”

However, she points out that the new funds are very different to their predecessors. “A lot of people got burnt with single balanced managers in the past, but those products were based on quant models with managers making big calls.”

Attracting financial adviser interest

Although a formal category name for the new funds is still being debated, they are starting to garner interest in the Australian market. This follows a strong start in the United Kingdom, particularly among defined benefit pension funds.

AMP Capital is the latest manager to take advantage of this interest, recently extending its Multi-Asset Fund into the retail market. This followed extensive research which identified an opportunity to improve on existing diversified funds, according to Matthew Hopkins, senior portfolio manager for the new fund. 

“We looked at diversified funds globally and came to the conclusion they could be managed more flexibly and there were better ways of managing risk. Previously there had been a concentration on equity premium risk, but we believe a more flexible approach is needed,” he explains.

“We make assumptions and change our return expectations depending on market conditions and what assets best meet those expectations.”

The new fund is likely to find a receptive audience, with financial adviser interest in the multi-asset fund concept rising. 

“There is increasing awareness of the potential benefits of these types of funds and we are seeing some good performances,” Hopkins says.

“They have been a continuing success overseas and are a well-established component of the market in the UK.”

Doyle agrees interest is strong. “The multi-asset space is seeing a lot of engagement at multiple levels and we are being asked to come and talk to different groups, including super fund trustees – especially about the post-retirement phase – consultants and dealer groups.”

He says the products were the subject of significant financial adviser attention during Schroders’ recent national road show and he believes the timing is right for these funds. “There is strong interest in the real return concept and we have seen a dialling up of interest levels.”

Hopkins reports a similar positive response. “For financial planners, researchers and platforms, the message has resonated. 

“Other funds have also been finding a positive reaction and financial advisers have indicated they plan to use them.”

Certain aspects of the multi-asset fund story have real appeal in the current market. “In particular the message about actively managing risk has resonated with financial advisers. We have a big focus on risk management,” Hopkins explains.

Bradley is another who believes there is definitely a place for multi-asset funds in the local market.

“We are seeing a positive response – and particularly to our income product – as many funds on the market at the moment focus on a single asset class. Financial advisers are very receptive to a fund generating income from multiple asset classes,” she says.

Fuller believes the introduction of multi-asset funds is a welcome development. “There is a change in focus to risk and volatility in the market and this is a good step towards dealing with that. This is a positive trend for the industry.”

Some way to go

Despite the good financial adviser response, inflows have been slow.

“We are seeing an exponential increase in interest, but cashflows are not matching it as yet,” Doyle admits.

Fuller agrees the new funds are yet to see the dollars flow. “It is going to take a track record from some of the funds before the inflows really follow.”

Hopkins believes the key is for financial advisers and trustees to learn more about the advantages of multi-asset funds. “A lot of education is needed on the aim of achieving after-inflation returns over time.”

Bradley agrees advisers need more information about what the products can do for some clients.

“Our industry is one still focussed largely on the accumulation phase and model portfolios based on a sector-specialist strategic asset allocation approach. While this method works for accumulators with a long-term horizon, timely active asset allocation with a solution focused on the total return is increasingly important in the retirement phase.”

Benefits for everyone

Despite the slow take-up, there are several advantages with multi-asset funds. 

Fuller lists these as including better downside risk control, lack of a structural bias to any asset class, higher probability of reaching their objectives and lower volatility. “These funds target volatility much more than traditional funds.”

The emphasis on downside risk control is particularly appealing in a post-GFC world. “The whole portfolio construction and risk management part is more prominent in these funds. The fund responds to changing market conditions,” Hopkins explains.

In the superannuation sphere, this rapid response to market developments can make life easier for fund trustees.

“It takes a lot of pressure off trustees and financial planners as less monitoring is required. We can adjust asset allocation in a timely manner and do not have to wait for trustee approval,” Bradley notes.

“It also avoids the implementation risk of having multiple managers, which is a big issue for super funds as the market moves too quickly for trustee board meetings and there is often not timely decision-making. It is the same for financial planners if they do not have the appropriate administration and approvals in place.”

She contrasts this with the monthly – or even daily – meetings held by investment managers to reassess the fund’s asset allocation. “In volatile times you need to reassess both the portfolio and strategic decisions regularly.”

Another advantage of multi-asset funds is responsibility for performance falls squarely on the investment manager’s shoulders. 

“There is enhanced manager accountability as they have to stand by their calls. This is a massive change and it is brave of these guys to be pushing this, as it is a hard sell,” Fuller notes.

Doyle agrees it is up to the fund manager to perform. “If you put money into traditional balanced funds, then it means you are happy with the strategic asset allocation. However, if you put money into our Real Return Fund, then it means we are accountable for the return and how we allocate risk,” he says.

“This is a big shift in accountability. The manager is in the best position and has the flexibility to do it.”

Hopkins believes this new approach makes sense for investors. “There is an alignment of interest between the investment manager and the investor.”

Multi-asset managers believe there are also benefits for financial advisers’ own businesses if they embrace the new investment model.

“The logical conclusion is if financial planners have a couple of objective-based portfolios they use, then that costs less and leads to a better relationship with single managers, rather than having limited relationships with multiple managers,” Doyle argues.

It also provides savings in time and administration. “A single manager is responsible for implementation of portfolio changes, versus the time involved in dealing with 100 managers. There is a real advantage in having a much simpler strategy,” he says.

“It makes enormous sense for financial planners to use two to three portfolios as this provides sufficient diversity in style and manager selection, coupled with ease of implementation.”

In a post-FOFA world, there are also benefits in terms of client relationships. “There is an advantage to the financial adviser in that they can spend more time with the client and on building their business,” Doyle says.

Negatives as well

While there are many advantages in using multi-assets funds, there are also some downsides.

“They rely heavily on manager skill and the ability to pick where the market is going,” Fuller notes.

Bradley agrees this can be an issue: “Financial planners need to get their heads around it to use them.”

They are also unlikely to be world-beaters in specific market conditions. “There will be environments where they will underperform,” Hopkins admits.

Doyle believes this is more of an issue for certain investors than others. “Peer risk is very important for some investors such as super funds and this leads to everyone following the same model.”

It could mean underperformance will lead to asset outflows. “There is a lot of business risk in these funds if managers can’t attract strong inflows – especially in strong bull markets as they will not look as flash then,” Fuller explains.

From the financial adviser’s perspective, the main disadvantage comes down to control. “For financial planners, there could be a loss of control as they are delegating more of the investment function out,” Doyle notes.

He says financial advisers who are seeking to develop bespoke portfolios may find multi-asset funds unsuitable. “There is less ability to tailor individual portfolios.” 

Hopkins agrees control can be an issue. “The fund can change and financial advisers may feel as though they do not always know what they will get, but it is very transparent.”

However, the major hurdle for multi-asset funds seems to be helping financial advisers work out how to use them when they are constructing a client portfolio.

“Everyone is very interested in the concept, but the retail industry is uncertain how to use them in a total portfolio, or in a model portfolio with multiple other managers. They do not fit the model portfolio system and this creates problems,” Bradley says.

Hopkins believes multi-asset funds can be used in several ways. “We see a variety of applications. They could be a major component, or used in combination with other diversified funds. They are quite flexible in how they can be applied by the financial planner and used in a client portfolio.”

According to Fuller, multi-asset funds do not fit easily into current financial planning software, leaving financial advisers struggling on how to use them. “They do not fit a growth/defensive framework and the question is how to fit them into the core portfolio.”

She believes financial planners are likely to end up using multi-asset funds either as the core of the portfolio with satellites around it, or as part of the alternatives allocation within the portfolio.

Although the software issue is holding back their appeal at the moment, Fuller says this will change in time. “There are a few hurdles to overcome, but we like them as a new product.”