Lonsec’s annual review of the Multi-Asset Class Fund sector has found that a number of developments have occurred in this sector over the past 12-18 months.
Senior Investment Analyst Deanne Fuller commented, “Lonsec has traditionally reviewed Diversified and Multi-Manager Funds as separate sectors. As well as bringing both fund types under one ‘Multi-Asset Class’ sector, we have expanded the review to include new products – Multi-Asset Real Return Funds and Multi-Asset Income Funds.”
“Many traditional Multi-Asset Class Funds disappointed during and after the GFC. They experienced significant drawdowns brought about by being structurally required to hold as much as 70% in equities.”
Most traditional Multi-Asset Class Funds have been managed with reference to a strategic asset allocation (SAA) framework, with some tactical asset allocation (TAA) tilts. Following the GFC, a number of managers, including Mercer, MLC and Russell, widened their asset allocation ranges to opt for a more dynamic approach to asset allocation.
“While SAA is typically long term and TAA shorter-term, Dynamic Asset Allocation (DAA) aims to take positions over the medium term when markets are extremely over or undervalued,” said Fuller.
“We see this approach to be particularly beneficial when used as a risk management tool, used to protect on the downside when markets are extremely overvalued, rather than used to generate alpha from the process (market timing bets).”
Does DAA go far enough?
While useful in providing some additional flexibility, DAA doesn’t go far enough for a small group of managers, including AMP, MLC, Schroder and Select. They argue that markets have entered a period of heightened volatility and the need for flexibility in asset allocation is essential in delivering portfolio risk and return objectives.
“This includes the ability to ‘go anywhere’ – meaning the fund may be completely divested from a particular asset class in periods of sever market stress,” commented Fuller.
“It allows for more opportunistic investing in new asset classes as and when opportunities arise.”
“These funds aim to limit the extent and severity of drawdowns and deliver a ‘real rate’ of return above cash or inflation, hence the name ‘Multi-Asset Real Return Funds.”
What sets these funds apart from their more traditional counterparts is the absence of the structural impediments usually associated with SAA.
In a similar vein, Multi-Asset Income Funds allow for flexible asset allocation in order to deliver a more reliable income stream to investors.
“These funds are designed for those investors who have a need for stable and consistent yield, for example retirees,” said Fuller.
“They are designed to be liquid, invest across a range of income producing assets, provide a regular, stable income, a level of capital growth to keep pace with inflation and to provide some downside protection.”
While in their infancy, these new style funds are designed to overcome some of the issues raised post GFC and are considered to be an exciting development within the space. That said, Lonsec recognises that no one investment style will outperform in all market conditions. Multi-Asset Real Return Funds are likely to underperform their more traditional counterparts in strong bull equity markets, but as a trade-off, will potentially provide a smoother ride for investors.
While traditional SAA does have its limitations, providing the underlying assumptions (risk, returns, correlations) are regularly revisited and risk is considered in its broadest sense, the traditional SAA approach can still be an appropriate way to invest for those with long-term investment horizons.
The review
Lonsec’s Multi-Asset Class Sector Review covered 27 fund managers across 37 fund ranges and assigned ratings on over 120 individual funds across the four sub-categories:
- Diversified (14 fund ranges)
- Multi-Asset/Multi-Manager (16 fund ranges)
- Multi-Asset Income (two funds)
- Multi-Asset Real Return (five funds).
