Investors have been well shielded from broader weakness in the UK equities market, as well as from relatively flat returns from strategic bond funds, in buying multi-asset funds in 2015, according to research by FE Trustnet.
Demand for multi-asset funds has exploded in recent years with the appeal of portfolios that have in-built diversification growing in attraction alongside worries about the fixed income market and an ever increasing importance placed on income.
The likes of Rathbones head of multi-asset David Coombs have warned that demand for yield has pushed investors into increasingly risky parts of the market and that many ‘cautious’ funds could be anything but cautious from here, putting them at risk in a major sell-off.
“What normally happens when you get a lot of factors chasing a narrow range of assets? Well, it’s the ‘B’ word isn’t it? It is something that always strikes fear into any investor. I think we are starting to see, maybe not big fat bubbles like 1999, but small bubbles emerging all across the income producing asset classes,” he said.
2015, and to some extent 2014, has been a year where the purpose multi-asset funds have been designed for has been put to the test with worries of a slowdown in China and the potential for rising US interest rates keeping markets on tenterhooks for most of the year.
Volatility and sluggish at best returns have been the dominant features of both bonds and equities, while the returns from the likes of property, which were quite reasonable last year, have been much less so in 2015.
According to FE Analytics, since the beginning of 2015 the IA Property sector average is up 1.84 per cent while the broader fixed income market is slightly ahead and the FTSE All Share is down 4.24 per cent. The average fund in the IA Sterling Strategic Bond sector has been neutral.
Performance of sectors and indices in 2015
Source: FE Analytics
However, looking at the multi-asset funds across the IA Mixed Investment 0%-35% Shares, IA Mixed Investment 20%-60% Shares, IA Mixed Investment 40%-85% Shares and IA Flexible Investment sectors we can see that taken on average the 453 funds in the four sectors have beaten equities for total return.
Performance of sectors and index 2015
Source: FE Analytics
Drilling down and looking at every fund across these sectors, which are quite diverse, we can see that 89 per cent have beaten the FTSE All Share. Some 67 per cent have having lost less than the index while 22 per cent have clocked up a positive return.
Also every fund except four, which are all focused in emerging markets or Japan, has done so with lower volatility than the FTSE All Share. Over three years, the lower volatility also stands out with these four funds the only ones with greater volatility than the FTSE All Share.
Performance of sectors and index 2015
Source: FE Analytics
But in terms of returns, over three years just one-third have delivered a higher total return than the FTSE All Share.
NN Investment Partners head of multi-asset Valentijn van Nieuwenhuijzen says multi-asset has likely had such huge interest due to a negative perception of the bond market.
“I think that with yields where they are the first things to be aware of are that seeing fixed income as the safest option out there is really risky approach and global diversified multi-asset funds are a good alternative,” he said.
“However, it is something that has become very popular and that could reverse if things reverse but it doesn’t take away the fact that if you construct your portfolio in a smart way then I don’t think you need anything more.”
Van Nieuwenhuijzen adds that the past three years have been a fairly obvious environment to be overweight equities but that the team has just recently gone underweight.
“We now have quite defensive tilt in our portfolios ... than the last few years.” he said.
Tommaso Mancuso, head of multi-asset strategy at Hermes, argues that as with any asset, the performance of different ‘asset strategies’ depends on a host of factors and are subject to biases and cyclicality
As such, consensus trades such as avoiding bonds can be a good idea in one market and bad in another.
“The one key attribute that we believe all asset bundling methodologies should share is simplicity. Simple approaches tend to be more robust over time while complex and optimised processes usually inexorably fade away,” he said.
“Perhaps more importantly, it is easier to stick with a simple process during turbulent times. At Hermes we see significant value in diversifying risk across different portfolio construction methodologies.”
However, he says in a multi-asset portfolio, top-down asset allocation is likely to be the main driver of returns.
“However, the differences in returns when comparing portfolio construction methodologies are likely to be smaller than those when comparing the same portfolio methodology applied to a different asset mix,” he added.