The extraordinary rise in correlation between asset classes last year, when all investments fell at the same time, hit multi-asset funds particularly hard.
Indeed, the raison d'être of these strategies, which represent an evolution of the more traditional balanced funds investing in equities and bonds, is to offer diversification by spreading money across different asset classes and geographies, and aim at reducing the overall risk of a portfolio for a given level of expected return.
Nevertheless, new successful launches in this space indicate that appetite for these more complex instruments is coming back.
ATTRACTING INFLOWS
The HSBC World Selection range, a globally-diverse multi-manager, multi-asset fund available to UK distributors has attracted £500m (E555m) within the first six months of launch. “We launched our range in January at a time when you might have thought that launching a multi-asset range was not the right thing to do,” says Joanna Munro, CEO, Multi-manager at HSBC Global Asset Management.
But one of the big lessons that people have learned from the financial crisis is the importance of relying on experts to make investments and asset allocation decisions, without the investors having to worry beyond making initial investments in this product, says Ms Munro. “That’s clearly touched a need in the market,” she says.
Since inception in January, the core multi-asset fund of the HSBC World Selection range delivered, gross of fees, approximately the same return as the MSCI World benchmark, 10 per cent, with around one third of the volatility, 8 per cent versus 22 per cent of the benchmark, claims Ms Munro. HSBC runs similar products for cross border and global distribution.
The HSBC world selection range offers three risk profiles for retail investors but it can also be customised to meet high net worth investors’ specific needs.
“A multi-asset fund is not a simple product; it needs a lot of resources and a lot of expertise to make it work properly,” warns Ms Munro.
In addition to the return offered by the individual asset classes and active allocation decisions, further value to the portfolio is provided by picking the best managers. “We interpret multi-asset funds as multi-manager funds as we don’t believe that anyone manager can be the best at everything.”
It is debatable whether these products are more suitable in a volatile or stable market. “If you buy this product in a volatile market, you might be entering them at the wrong time,” says Ms Munro. “I genuinely think that multi-asset funds are all weather products, this is how we design them.”
THE FAILURE OF DIVERSIFICATION
What the crisis has brought to the forefront of investors’ minds is that diversification did not work and “buy and hold” approach proved wrong, acknowledges Dr Peter J. Mathis, head of fixed income core and private banking discretionary platforms at ING Investment Management.
Most managers use a fixed allocation between different asset classes with no or very little active management, and this is why a lot of people are disappointed with these products. “When correlation started to move to one and all assets went down, a lot of products got hurt last year. What is really important is to actively manage the downside risk of the investment, in order to limit the maximum loss that a client can have at any point in time.”
Some of ING’s multi-asset funds have an active management of a predefined maximum Value-at-Risk (VaR). This ensures that over a 12 month horizon investors can limit their losses to a certain fixed percentage, say, 5 or 10 per cent of their money, with a 95 per cent level of confidence.
“A very active asset allocation is needed to achieve the highest possible total return given the level of risk, and if you employ external managers to run part of your money, in a fund of funds structure, you need to adopt a hire and fire approach with them,” says Dr Mathis.
There are about 40 asset classes that can be employed in the fund and a vast amount of instruments, such as funds, ETFs or direct lines, he explains. “We also use derivatives for hedging purposes, predominantly futures and currency forward,” says Dr Mathis.
Monitoring 40 different asset classes does not mean that there are always so many in the portfolio, explains Dr Mathis. “We are looking at what are the most attractive ones, we are very opportunistic. We generally employ 20 to 25 asset classes in our multi-asset funds.”
Bruno Saugnac, head of global balanced fund management at Crédit Agricole Asset Management, also strongly advocates the importance of using more flexibility in products.
