The report shows that the sector is expected to experience increased market demand amidst an environment of heightened asset-class volatility and uncertainty. 

Multi-sector funds were previously considered the domain of retail investors seeking a diversified and relatively low cost investment solution, however S&P believes that they will gain in popularity amongst larger and more sophisticated investors. This is due to an increased emphasis on asset allocation and strategy selection as alternate and more enduring sources of alpha and risk-management, particularly in an investment landscape where active manager selection has become more difficult. 

S&P Fund Services analyst Andrew Yap stated that “in a move away from past years, the strategic asset allocation only format is becoming less typical as managers move beyond the ‘set and forget’ approach to asset allocation, toward more flexible investment mandates. This permits exposure to alternative assets and strategies, while also incorporating tactical asset allocation to supplement existing alpha sources and control downside risk.” 

“There has also been a move to introduce more targeted investment solutions, including ‘objective-based absolute return’ and ‘income-orientated’ funds. More dynamic and less constrained in approach, these offerings are in part a response to an increasingly sophisticated investor base, and investors with more specific investment needs,” Mr Yap said. 

A key finding of the report was increased product enhancement, with a number of managers dedicating significant time and resources to bolster their existing multi-sector capabilities. Some sector participants have significantly progressed investment processes by using scenario analysis and Monte Carlo simulations to construct portfolios that produce more predicable, and resilient, investment outcomes despite varying market conditions. 

Technical development was also identified as an area of focus, with the highest rated managers investing heavily to advance portfolio-monitoring and risk-management tools. These managers are moving toward an increasingly comprehensive and real-time assessment of risk and attribution. 

The report shows that effective multi-sector portfolio managers display a number of investment traits that extend beyond that of single asset-class managers. Standout portfolio managers have a breadth of knowledge and experience spanning portfolio construction (including implementation processes), macro-economic analysis, regional and developed markets, active asset allocation, strategy, and manager selection.

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In this release, 23 investment strategies are rated, five having been affirmed, two upgraded, and thirteen downgraded. Three strategies are newly rated.  

Among the downgrades are MLC’s Horizon and MasterKey capabilities. “Our reduced conviction is reflective of a number of factors including team change, lagging risk systems, mixed performance, and a general strengthening among competitor offerings,” said S&P fund analyst, Andrew Yap. 

The Blackrock Wholesale Balanced Fund has also been downgraded. “While it yet remains a sound offering among rated peers, we consider that the competitive advantage of this capability is diluted by the manager’s awareness of competitors when forming its strategic asset allocation,” said Mr Yap. 

“Select’s Defensive and Growth funds were upgraded on our heightened conviction in the Sydney-based investment team and our more favourable opinion on aspects of the product,” said Mr Yap. 

S&P notes that from early 2012, the BlackRock Balanced Fund and Select’s Defensive and Growth funds will each be moved to the multi-asset peer group (within the alternatives sector), which we consider is more representative of their investment mandates. This peer group comprises those capabilities that permit a more extensive use of alternatives, leverage, shorting, derivatives, commodities, and private equity. 

S&P will shortly release its comprehensive sector report on the multi-sector peer group, which will include our key findings and sector themes from the review.

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As a result of this release, 24 investment strategies have had their rating affirmed, 15 have been upgraded, while five have been downgraded. Eight strategies remain ‘On Hold’ and six are newly rated. 

“Multi-sector funds have once again sparked the interest of investors, particularly among those seeking advice-embedded investment solutions. We consider that renewed interest has been partly driven by the increasingly volatile market conditions that presently exist, and the belief that in a less certain macroeconomic landscape, the case for asset allocation and prudent strategy selection is further strengthened,” stated S&P fund analyst, Andrew Yap. 

“Multi-sector funds can no longer be considered relics of the past. Rather, through the incorporation of more sophisticated strategies—such as tactical and dynamic asset allocation, and extension of investment mandates to permit exposure to less traditional asset classes—they continue to evolve to keep pace with the investment needs of a more sophisticated investor base,” said Mr Yap.

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