Picking a winner

The multi-asset success story has led to the birth of an array of funds under the same all-encompassing banner. With so much choice and varying degrees of performance, Charlotte Moore asks if they are too heterogeneous to be helpful.

“If efficient market theory is even partially correct, then achieving equity-like returns with half the risk requires exceptional manager skills.”

Paul Berriman, Willis Towers Watson

Multi-asset funds have been one of the great success stories of the past decade. Spooked by financial market volatility during the global financial crisis, institutional investors have found their promise of equity-like returns with reduced volatility irresistible.This popularity has inevitably attracted new market participants. There is now a bewildering array of different strategies, united by their use of multiple asset classes and little else.At one end of the spectrum are more traditional balanced managed funds, while esoteric quantitative strategies exist at the other. The dispersion of performance is equally broad.Such a heterogeneous approach to multi asset makes it harder for schemes to select the right fund which matches their particular characteristics and investment goals. Such diverse performance also means there is no guarantee the strategy will meet its target.Making your mind upThe only way to find the right fund for a particular scheme is to look at every fund in detail. Paul Berriman, global head of Willis Towers Watson’s funds business, says: “It’s important to understand the investment strategy as well as return target for each and what risk measures are being used.”Focusing on the return target and the approach to risk will help the pension scheme to understand whether a fund will deliver to a particular scheme’s investment targets, he adds.This broad choice raises the question of how useful these funds can be to institutional investors and how they should go about selecting the right fund. To make the task easier, it helps to group similar strategies together. Within the global multi-asset fund universe, there is a group of diversified inflation funds.Kishen Ganatra, senior manager and research analyst at Mercer, says: “These funds are aimed at the US retail and defined contribution (DC) market so are not particularly relevant for the UK.”The second group are risk parity funds – which aim to give an equal risk weighting to each asset class in the strategy. This group is also aimed at the US so is not particularly relevant for UK institutions.The two classes which are the best for UK institutional investors are core and idiosyncratic strategies. Ganatra says: “Core strategies are the most traditional and straightforward. The most naïve version is a balanced fund.”This strategy relies on traditional market movements to generate the majority of return. Ganatra says: “These strategies aim to give the investor a diversified portfolio of equities, fixed income and possibly alternatives.” The asset allocation will be relatively static.The management of core multi-asset funds has changed in recent years. Traditional diversified growth funds once used active management and investments in hedge funds.Ganatra says: “The heavy use of active management meant the fees for this type of fund were quite high.”In addition, these types of fund tended to be highly correlated to equity markets.Rather than using higher cost funds with a higher correlation to equity markets, schemes should consider using a fund which uses a passive building block to lower the cost but still offer a diversified strategy.