Multi-Asset Strategy: At Inflexion Point October 2014
Table of Contents Highlights .............................................................................................................................. 3 Volatility Across Asset Classes ................................................................................................ 3 What Changed Along the Way? .............................................................................................. 4 Investors Throng Multi-Asset Funds, Lured by Outperformance, Positive Returns .................... 4 Yet, There Is No ‘Good’ or ‘Bad’ Time for a Multi-Asset Strategy.............................................. 6 There Is No Single Multi-Asset Strategy .................................................................................. 6 Conclusion ............................................................................................................................. 7
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Highlights •
Since the peak of the credit crisis in 2009, it has been a roller-coaster ride for investors with sharp movements across all key asset classes and geographies, creating uncertainty.
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Geopolitical tensions, monetary rollbacks and tepid developing market growth continue to remain a drag on global economic recovery.
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Multi-asset indices have provided more stable returns and among some asset classes have also outperformed the broader hedge fund index. Further, money flow into multi-asset funds has surged, while investment mandates are becoming more diverse.
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From being just ‘plain vanilla’ debt and equity mix, multi-asset investment options have become increasingly multi-dimensional, spanning newer asset classes and geographies.
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In this backdrop, we explore the long-term prospects of the multi-asset strategy.
Volatility Across Asset Classes Diversification is said to be the investor’s only free lunch, and some of the world’s leading asset managers are increasingly adopting the Multi-Asset strategy to keep their investors well fed. As such, post the peak of the global financial crisis in 2008, key global equity markets have rebounded to provide high returns. However, it has been a roller-coaster ride for investors with sharp rises and declines across nearly all key asset classes and geographies, driven by changing geopolitical, macroeconomic situations as well as extraordinary monetary policies. Figure 1: Equity Market Performance (MSCI World Index) 30% 5%
27%
18% 7%
8%
24%
10%
13%
-20%
-8% -42%
-45% 2005
2006
2007
2008
2009
2010
2011
2012
2013
Source: Bloomberg, MSCI
Figure 2: Divergence Performance across Asset Classes Divergence in performance
22% 17% 12% 7% 2% -3% -8%
2009
2010 2011 REIT Long/Short Equity Sov Bonds
2012 Hedge Funds
2013
Source: Bloomberg, Credit Suisse, Morningstar
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In this paper, we try to unearth the reasons behind the recent popularity and sustainability of MultiAsset strategy funds, which have apparently not only outperformed the broader hedge fund universe but also drawn high inflows.
What Changed Along the Way? Uncertainty about a Clear Asset Class Winner: Since the crisis, economic recovery has been slow and uneven. GDP growth of the developed world has been below the pre-crisis level, while government debt is soaring and the unemployment rate, though falling, remains at an elevated level, contributing to uncertainties. One geopolitical crisis after another has added to the uncertain outlook. Moreover, with the beginning of a monetary rollback, the threat of a large chunk of liquidity being sucked out of the market looms large, adding to uncertainty of fund flow and consequently of asset prices. To top it all, sharp rise and fall in prices of commodities, precious metals and equities, and the prospect of a ‘bubble’ in fixed income, as some observers cite, make the single-asset investment approach untenable. These factors have thus improved the odds of a multi-asset investment success. Figure 3: Economic Health of G7 – GDP Growth 4%
3.0%
2.5%
2.6%
2.8%
2.2%
2%
Subdued economic recovery 1.7% 1.6% 1.4%
0% -2%
-0.3%
-4%
-3.8% 2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Source: IMF WEO Database
Investors Throng Multi-Asset Funds, Lured by Outperformance, Positive Returns Multi-Asset Funds’ Emergence as a Low-Risk Alternative: Multi-asset strategy, endowed with diversification benefits, has increasingly been seen as a low-risk investment component of an average portfolio. The ‘low-risk’ tag – which was earlier with fixed-income instruments – has lost some sheen in light of the stresses seen in the credit market and the historical low yields. The depressed government bond yields are unlikely to provide high fixed-income investment return, despite low inflation expectations. The quest for income has encouraged many investors to consider varying potential sources. This can be seen, especially in Europe, where the demand for multi-asset funds is high. Furthermore, Baby Boomers in the US are retiring at a time when stock dividend and bond yields are lower than their predecessors, creating a greater need for multi-asset portfolios, rather than a plain vanilla stock-bond portfolio. These factors are contributing to multi-asset being increasingly seen as a low-risk investment alternative. This is part of the larger, long-term trend predicted by KPMG in its ‘Investing in the future’ report, according to which, regions with ageing population are seeking more ‘safer investments’, creating additional demand for multi-asset funds.
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Stable and Positive Returns Are A Key to Attract Investors: With asset class performances contrasting and widely varying from year to year, investors will find succor in international mixed assets, which have seen more stable performance. While investors chase performance and switch between emerging and developed market funds over the past few years, those with a more balanced geographical portfolio benefitted from the divergence in performance. Figure 4: Erratic Fund Flows – Emerging Markets
Source: Morningstar, Expert Investors Europe
A diversified approach has paid off for many investors. Among the key asset class indices, multi-asset indices have provided less volatile and positive annual returns for all years since the crisis began. It has had the highest risk-adjusted return compared to the key asset classes of equity and debt, and also visĂ -vis the broader hedge fund performance. Figure 5: Return Performance across Key Asset Classes
22% 17% 12% 7% 2% -3% -8%
Return Standard Deviation
Multi Assets 9.8% 6.0%
2009
Equity 9.0% 10.6%
2010 Multi_Asset
Fixed Income 2.4% 3.7%
2011 Hedge Fund
Hedge Fund 8.7% 7.6%
2012 Equity (long/short)
2013 Fixed Income (Sov)
Source: Credit Suisse, Morningstar, Sutherland Global Services
Money Flows into Multi-Asset Funds: Indicating a shift in the trend towards the multi-asset approach, investor demand for such investments rose 33% in 2013 worldwide, as per a report by Mercer. According to the report, investors are gravitating towards multi-assets and have continued to increase
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allocations to global investments. It also notes that investment mandates are becoming more diverse ,
including investment in alternative assets and diversified growth funds. The rising popularity of the strategy is reflected in the rising fund flows. According to Thomson Reuters, Mixed-Asset funds received a commitment of EUR 62.5 billion in 1H 2014, surpassing inflows in pure equity by EUR 2 billion, in Europe. According to data from FE Analytics, from just two funds characterized as “multi-asset” in 1992, there are now more than 1,500 strategies labelled as “multi-asset” globally.
Yet, There Is No ‘Good’ or ‘Bad’ Time for a Multi-Asset Strategy Funds Gearing Up for a Larger Multi-Asset Role: The current economic and market conditions are propping up multi-asset strategies, with various fund houses ramping up their multi-asset offerings. Many of the fund houses are hiring managers to handle a growing multi-asset portfolio and streamlining and marketing funds to take advantage of the trend. In a May 2014 survey by State Street and the research group FT Remark, of 300 senior executives at asset management firms across Europe, the AsiaPacific, and North America more than two-thirds were found focused on expanding their multi-asset offerings over the next three years. Lack of Awareness Contributed to Lower Inflows into Multi-Asset Funds in the Past: We believe that the multi-asset investment approach ought to be an important part of a fund house’s investor education function. Lack of awareness has kept many investors away from the ‘returns smoothening’ effect of a multiasset investment approach and has exposed them to the risk of sharp losses when cycles turn, catching them unaware. This brings us to the competitive race among funds for being the first to ‘time the market’. Commitment to Strategy, and Not Market Timing, Is the Key: While timing the market brings with it high returns, doing it consistently and for a longer term is no less than a feat for any fund house. And research shows that no fund house has managed to do it, simply because markets move in unpredictable ways, affected by a host of economic and geopolitical factors. Investor psychology is affected by the short-term, narrow focus on ‘what’s beating the market now’ approach, rather than a longer-term multi-asset investment approach. Once investors realize that markets cannot be consistently timed, they will know that there is no ‘good’ or ‘bad’ time to employ a multi-asset approach, irrespective of the current ‘hot’ asset class or geography.
There Is No Single Multi-Asset Strategy There is a misconception in certain quarters of investors that a multi-asset strategy is a singular investment option. A couple of decades back, multi-assets basically meant equities and bonds. However, around mid-2000s a wide range of differences in portfolios following a multi-asset strategy started to emerge. Property, infrastructure, alternatives, currencies, private equity, convertibles, structured products and commodities have all started to become more commonplace in multi-asset portfolios. Investors are to choose between a standard multi-asset investment option and a multi-asset incomegenerating fund (the latter being useful for investors who need not depend on just fixed-income assets under a low-yield environment).
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Conclusion With changing market dynamics and investor preferences, investment styles are subject to ‘fads’ and ‘flavors’. However, beneficial effects of asset diversification cannot be overstressed. In a world increasingly faced with growing economic and political uncertainty and shorter cycles of technological advances, exploiting investment benefits of low (and changing) correlation assets (separated by asset class and geography) is likely to continue to improve chances of more stable longer-term returns. While diversification always has had higher chances to yield the proverbial ‘free lunch’ to investors, we see a concrete longer term trend towards multi-asset investment approach, driven by rising investment options, elevated levels of uncertainty and investor willingness to spread their risks.
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