Lonsec’s 2010 Diversified Funds Sector Review resulted in the assignment of two Highly Recommended ratings, to BlackRock and Schroders. The ratings assigned to each manager generally apply across the various risk profiles and fund structures.
Key themes to emerge from the Sector Review
Stable resourcing
Managers have remained relatively steady in the diversified funds space, with the average investment team size of seven people. Deanne Fuller, Senior Investment Analyst responsible for this sector review, commented, “The size of the investment team in most cases represents the number of individuals having input into the asset allocation process. The number actually responsible for day-to-day management of the funds is generally between 1-3 people.”
“The great thing is the high level of investment experience of the people involved in managing diversified funds, with an average of 13 years’ experience.”
FUM increases, outflows continue
While overall, funds under management (FUM) has increased across the board, rising from $42.2bn in December 2008 to $52.2bn in December 2009, the majority of managers experienced outflows during this period.
“The increase in FUM is due to improved market performance rather than inflows, although a few managers did record positive flows, most notably index manager Vanguard, which experienced substantials flows totalling 13% of FUM,” said Fuller.
“Despite declining FUM, diversified funds continue to play an important role for investors (particularly those with limited capital to invest) and significant capital remains invested in them.”
Strategic asset allocations retain stable
There has been little change to the strategic asset allocation (SAA) within diversified funds since Lonsec’s last review. Australian equities continue to dominate asset allocations with managers allocating an average of 37% to the sector. Global equities form the next largest allocation with an average of 24%.
“While global property is considered to be a ‘mainstream’ asset among multi-managers, less than half of the diversified growth funds we assessed allocate capital to this sector,” observed Fuller. “Those that do allocate an average of 4%.”
From 11 growth managers Lonsec reviewed, seven now include alternative assets in the SAA. “Alternatives used include hedge funds, commodities, mortgages, infrastructure, high yield credit and inflation linked bonds,” said Fuller.
“The trend going forward is expected to be towards alternative assets with greater transparency and liquidity.”
Single manager vs. multi-manager
In a reversal of last year’s results, diversified funds have underperformed their multi-manager counterparts by 1% over the last year. Over longer time periods however, diversified funds continue to outperform due to their stronger relative performance during the global financial crisis.
“The global financial crisis highlighted the importance of tactical asset allocation (the ability to tactically under/over weight certain asset classes at various stages of the economic cycle) in quickly and efficiently reducing risk within a portfolio,” observed Fuller.
“Diversified funds (single manager) include TAA as part of their process and their ability to underweight equity market exposures during the global financial crisis lead to a significant outperformance of their multi-manager counterparts.”
“In addition, diversified fund returns have been achieved with lower levels of risk than equivalent multi-manager strategies over all time periods,” added Fuller.
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