Source: fundstrategy magazine
Groups launch multi-asset products as stability returns to the markets and investors seek the benefits of diversification in one portfolio, which provides absolute returns in the long term.
Multi-asset portfolios are enjoying a resurgence in popularity, according to research published in December. A survey, conducted by 1st The Exchange, a technology firm, found that more than one-third of advisers expect such funds to be “the hot financial product of 2010”. Absolute return and passive strategies took second and third place.
A spate of launches also indicates that managers expect retail demand for diversified funds to rise further. Fidelity International announced the expansion of its multi-asset offering in November, with the addition of Growth and Defensive portfolios–designed to sit alongside the firm’s Multi Asset Strategic Oeic.
“The year before last, correlations went to one and managers were lambasted”
Scottish Widows Investment Partnership (Swip) followed suit in January by adding a Multi-Manager Optimal Multi-Asset fund to its range and–as Fund Strategy reported last week–Heartwood Wealth Management and Prudential are the latest groups to unveil diversified strategies for retail investors.
Prudential has launched five risk-rated multi-asset funds in collaboration with Old Broad Street Research (OBSR), while Heartwood expects to introduce Balanced and Balanced Income portfolios in the first quarter of 2010. Its funds will invest across several asset types, including alternatives, structured products and derivatives.
The concept of retail multi-asset class funds is not a new one. A wave of such products came to the market in late-2006 and early-2007, including Fidelity Multi Asset Strategic, M&G Cautious Multi Asset, Swip Diversified Assets, and HSBC’s Open Global Return and Open Global Distribution portfolios.
Investor confidence was hit by poor returns from some funds in the final quarter of 2008, as panic-selling across most asset classes caused correlations to rise–largely nullifying the benefits of diversification. But with markets on a more stable footing, the concept appears to be striking a chord with investors once again.
David Wynn, the investment director at RSM Tenon and an Adviser Fund Index (AFI) panellist, says he has been “banging the drum” for diversification over the past three years. He uses a range of multi-asset funds in the AFI: Cazenove Multi-Manager Diversity, CF Miton Special Situations, JPM Cautious Total Return and Newton Real Return. The Miton fund appears across all three of Wynn’s AFI portfolios.
While he admits the strategy offered little protection during the market sell-off in 2008, Wynn says his AFI holdings have since largely recovered. “The year before last, correlations went to one and managers were lambasted,” he says. “It comes down to managing expectations. What you get with multi-asset is an absolute return on a rolling three-year basis–investors have to look at these funds over the long term.”
Wynn notes the convergence of “multi-asset” and “absolute return” approaches in the retail fund market–the new Swip fund, for example, has an absolute return target of the London Interbank Offered Rate (Libor) plus 6%. Demand for multi-asset and absolute return products is part of the same, wider trend towards hedge fund-style, cash-plus strategies within regulated structures, he adds.
Other AFI panellists have chosen to launch their own multi-asset funds, rather than rely on third-party managers. Allenbridge unveiled its Strategic Alpha fund of funds in July, 2008 (see first pie chart). Jonathan Wallis, the firm’s director of research, says the portfolio is largely long-only equity, but was able to go “very defensive” in the second half of 2008, by taking positions in bonds and absolute return funds.
AFH Wealth Management, meanwhile, launched its MGTS St Johns Realistic Core portfolio last December. At the start of 2010, the fund held 40% of its assets in cash and money market instruments (see second pie chart).
Its global equity allocation was split across a range of iShares sector-specific exchange traded funds, while the bulk of its fixed income exposure came from the Schroder Strategic Bond portfolio.
Graham Toone, the head of investment research at AFH, says the fund has a benchmark based 40% on gilts and 60% on equities.
Toone is sceptical on the perceived diversification benefits of some alternative assets, including hedge funds and commodities.
“It is fair to say that in 2008, the diversification benefits of some asset classes were overplayed,” adds Toone. “Only gilts withstood the acid test.”
