Multi-asset funds come under fire due to 'unskilful managers'

A recently published hard-hitting study claims the vast majority of multi-asset fund managers are 'unskilful' and 'systematically damage returns'.

The report, from FinalytiQ, a research consultancy, scrutinised the risk-adjusted performance of 67 multi-asset fund ranges against a 'brainless portfolio' benchmark made up of a percentage allocation to two asset classes: global equities and global bonds.

Depending on the risk profile of the multi-asset fund, which ranged from one (lowest risk) to five (highest risk), the hypothetical equity benchmark weightings varied: 20 per cent, 40 per cent, 60 per cent, 80 per cent or 100 per cent.

FinalytiQ then created an 'efficient frontier curve' for each fund range, plotting risk-adjusted returns of each individual fund over one, three, five and 10 years. The risk-adjusted returns combine performance and volatility.


A theoretical 0.5 per cent charge was placed on the brainless portfolio. Charges on the active multi-asset fund ranges - comprising 308 individual funds holding £84 billion of investors' assets - varied significantly, with the most expensive coming in at 2.62 per cent. The average fund charge was 1.09 per cent.

The same exercise was repeated for a so-called 'real life' brainless portfolio: the Vanguard LifeStrategy fund range, a suite of five passive multi-asset funds that have been available in the UK since 2011.

These funds invest in various indices, with the equity weighting ranging from 20 to 100 per cent and the balance held in bonds and cash. The Vanguard fund fee is low, at 0.24 per cent.

active-multi-asset-returns-versus-passive-fundsAfter crunching all the numbers, the research consultancy concluded that the risk-adjusted performance of almost all the multi-asset fund ranges sat below both the brainless benchmark portfolio and the Vanguard LifeStrategy fund range, over every timeframe examined.

Across the board, in all five risk-profile categories, the vast majority of multi-asset funds failed to shine. Of the 42 fund ranges with full five-year performance data, 40 underperformed the two benchmark portfolios by 2 per cent a year or more over the period, on a risk-adjusted basis.

Commenting on the findings, FinalytiQ director Abraham Okusanya says: 'One key conclusion here is that there is no evidence that multi-asset managers' asset allocation and fund selection expertise is worth paying for.

'In fact, we find evidence to support the contrary: multi-asset fund managers are not just unskilful, but systematically damage returns and reduce [investors'] chances of meeting their objectives. To rub salt in the wound, they charge clients an arm and a leg for the privilege.'

Okusanya says one of the challenges of being a multi-asset fund manager is 'trying to get ahead of the curve': unearthing a new star fund manager before others, for example, or boosting exposure to an out-of-form equity market that is about to regain its poise.


While the FinalytiQ report was deeply critical of the performance of multi-asset funds, a small number were praised as consistent performers. Okusanya adds that there are 'pockets' in the multi-asset fund universe that are striving to deliver consistent returns for investors.

He names the Aviva Multi-Asset, BlackRock Consensus, Premier Multi-Asset and Schroder Multi-Manager ranges as best of breed.

Aviva's range consists of five funds, ranging from low risk (containing 16 per cent in equities) to high risk (75 per cent equities). The multi-asset range invests mainly in other Aviva funds.

BlackRock Consensus is also a range of five funds. Each fund has a profile description, designed to help advisers match funds with their clients' attitudes to risk.

For example, the BlackRock Consensus 60 fund is described as potentially suitable for 'cautious investors who are careful with their money and tend to have more savings in cash'.

The Premier Multi-Asset and Schroder Multi-Manager selections are both highly regarded among financial advisers, due to the experience of the managers in the hot seat - David Hambidge and Marcus Brookes.

The managers and their funds are also popular with do-it-yourself investors. According to FE Trustnet, Hambidge has outperformed peers in seven of the past 10 years, while Brookes tends to gain an edge in rising markets, outperforming in five years out of the last nine.

Investment trust options include the Ruffer Investment Company and Capital Gearing. Both are cautiously positioned due to unconventional central bank policy, which has increased the risk of elevated inflation.

But he cautions: 'What we have found is that most multi-asset managers don't add value over and above a simple low-cost equity and bond portfolio.'

The report has, as one would expect, received a cold reaction from active fund managers, who argue that Okusanya has not compared 'apples with apples'. In their defence, they have a point, as multi-asset fund managers have a wide toolkit at their disposal and do not just simply stick to shares and bonds.

Alternative assets such as property, infrastructure and commodities are also typically held, and usually account for around 15 per cent of a portfolio.

Some fund managers, particularly those focused on wealth preservation, even dabble in the currency markets, mainly as a means of protecting capital.


Damien Fahy, founder of online fund service Money to the Masses, points out that multi-asset funds tend to mix and match between different regions, rather than take an exclusively global approach. Indeed, it is fairly common for a multi-asset fund to have its biggest equity weighting in the UK.

However, on the whole, Fahy agrees with the conclusions of the research. 'The problem with multi-asset funds is that they are not bold enough, which is why many regularly produce pedestrian performance,' he says.

He also points out that the fund charge is a big handicap, given that many of the cautious funds simply aim to produce returns ahead of inflation.

'They are marketed as "buy and forget" funds, but I think that because they cost more than passive multi-asset funds, it is important to regularly review whether you are getting value for money - outperformance,' says Fahy.

The multi-asset universe is quite a mixed bag, with some funds adopting a cautious approach - holding no more than 35 per cent in equities - while others take greater risks in pursuit of higher returns.

These more adventurous funds reside in either the Investment Association's (IA's) flexible sector or the IA mixed investment 40-85 per cent shares sector.

Broadly speaking, among multi-asset funds there are two different strategies: risk-rated and risk-targeted. Risk-rated funds carry a risk score assigned by third-party companies, typically ranging from one (lowest risk) to 10 (highest risk).

The rating, however, is backward-looking, based on a single point in time, so it does not reflect what can happen in different market conditions.

Risk-targeted funds, in contrast, are forward-looking. A risk-targeted fund seeks to maximise returns to investors while maintaining a given risk profile, that is to say, a certain level of volatility.

So if a risk-targeted fund is labelled 'balanced', its manager will try to keep its volatility at levels suitable for 'balanced' investors.

Critics of this approach, including Andrew Merricks, head of investment at financial adviser Skerritt Consultants, argue that these fund managers tend to be too cautious. 'The danger of this approach is that the fund manager gets too hung up on not losing capital.

'Risk-targeted funds put risk before returns, but in doing so many fail to deliver meaningful outperformance. The danger of trying to combine returns by staying in a certain risk parameter is that investors are left with cash returns plus fees,' says Merricks.


There are also flaws with risk-rated funds, he adds. He points out that funds with a low risk score - 3 for example - will tend to have a meaty weighting to bonds. But currently, pockets of the bond market arguably carry greater risk than equities.

Indeed, over the past six months, bond funds that specialise in buying UK gilts have been more volatile than equity funds residing in the IA UK all companies sector.

The largest loss suffered by the average UK gilt fund in one week is 6.9 per cent, higher than the average UK all companies fund's largest loss of 5.9 per cent.

'We are no longer in a world where bonds will go up when equities fall and vice versa,' says Merricks.

'Both equities and bonds are tightly correlated today, as they were in 2008, when multi-asset funds fell like a stone - in some cases by as much as 30 per cent. So care needs to taken. Funds can be riskier than their risk rating implies.'

Both concepts - risk-rating and risk-targeting - are popular with financial advisers. The adviser carries out a risk assessment of a client and then puts them into an investment that is considered suitable for their goals and attitude to risk.

Last year alone, investors poured £3.5 billion into mixed-asset funds out of a total £16.8 billion of retail sales, according to IA figures.

With an increasing number of advisers focusing on financial planning, multi-asset funds have become one of the key ways for advisers to 'outsource' portfolio management.

By delegating asset allocation and fund selection to an asset manager, advisers have more time to carry out other duties - tax planning, for instance.

But the worry is that if financial advisers rely too heavily on risk ratings and don't look under the bonnet, they may not actually be seeing the whole picture as far as risk is concerned.

Okusanya says: 'We found several instances of an inconsistent risk-reward relationship, where clients in higher-risk portfolios are systematically being compensated with less return than clients in lower-risk portfolios.

'This threatens the integrity of advisers' process of matching a client's risk-profile with these multi-asset funds.'

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