UK: An Executive Summary Of The Multi-Asset Funds Market Review

Last Updated: 24 October 2018
Article by Andrew Cheung and Shan Gao

In 2016, MJ Hudson Allenbridge published a special report titled "Diversified Growth Funds – doing a good job?"1. The paper provided a brief overview on the diversified growth fund ("DGF") market at the time, considered key advantages of DGF funds and proposed an approach to selecting a suitable DGF manager from both qualitative and quantitative perspectives.

In an effort to update investors with the current products available, market trends, and challenges in this space, MJ Hudson Allenbridge decided to run this second edition of the market review in 2018, supported by a web-based survey with the participation of 37 asset managers, covering 91 institutional multi-asset funds, of which 81% (74) are DGFs. The survey was conducted during Q1 2018 via our proprietary online due diligence platform, MJHudsonIQ. In this report, we have looked at passive and active multi-asset strategies and have excluded any alternative risk premia2, multi-asset income and credit funds. We consider DGFs as an active multi-asset strategy, which comprises Risk-based Allocation Funds, Dynamic Asset Allocation Funds and Absolute Return Funds. Over the past few years, the rise of multi-asset strategies, especially DGFs, has been a significant trend in the UK institutional market. At MJ Hudson Allenbridge, we have seen some interest among our institutional clients, evidenced by some manager searches in the space over the last two years. Institutional adoption of the strategy has become widespread, albeit the recent disappointing returns have made investors sceptical; we have seen an increasing number of investment managers offering these products in the last few years.

SIZE AND SCOPE OF THE MARKET

  • We estimate around £400 billion of assets to be invested in multi-asset funds as of the date of the survey. Our survey covers approximately 75% of the managers in the market in terms of assets under management ("AuM");
  • Around one-third of asset managers witnessed asset growth in excess of 100% in the last two years (the time of our previous market review). Only two out of the thirty-seven respondents experienced significant declines in AuM (that is, 10% or greater) over the period, mainly due to dissatisfaction with performance and corporate restructuring;
  • The top five multi-asset managers by AuM held 52% of market share as of the date of the survey;
  • 53% of the surveyed managers do not place any capacity limits on their funds; the rest have either a hard limit or a soft limit, the latter, which can be readjusted depending on market dynamics.

CLIENT BASE

  • Corporate pension funds are the largest source of assets for multi-asset managers;
  • Multi-asset managers list Local Government Pension Schemes (LGPS) as the second largest source of assets. Other important sources were ultra-high net worth individuals, Family Offices, Endowments and Charities.

BENEFITS AND IMPEDIMENTS

  • Nearly all of the managers cited that investors were investing in multi-asset funds due to the ability to invest in multiple asset classes via a single vehicle and also to help reduce overall portfolio volatility;
  • Managers cited other benefits of investing in multi-asset funds included operational ease, lower fees and fewer governance resources relative to creating bespoke allocations to risk assets;
  • DGFs were identified by managers as an attractive product for investors who struggled to embrace a dynamic asset allocation model, especially for smaller institutional and individual investors who may lack resources;
  • Most managers stated that one of the key issues they faced is that DGFs lacked clarity in terms of standard definition, constituents and lack of recognised universal performance benchmarks. Managers cited these as the main impediment that could hinder both prospective and existing investors in further investing into the strategy;
  • Managers stated that DGFs that did not have income share classes (approximately half of overall multi-asset funds as of the date of the survey) were also considered as an impediment for prospective institutional investors, given that the latter find income distribution attractive for managing their pension obligations.

FEES

  • Increasing scrutiny on fees from investors and increased transparency on overall charges have created a downward pressure on fees in line with what has been observed in the broader asset management industry. Our survey found of the 91 funds we track, 17 of them have lowered their management fees by between 5 to 35 bps in the last three years;
  • The majority of the multi-asset funds (78%) have ongoing charges of less than 1% with the median management fee being 55 bps across the 91 funds that we track; Additionally, fee pressure is present, partly because some of the better performing multi-asset funds are passive/balanced funds which have lower fees;
  • Whilst uncommon amongst multi-asset funds, there are a minority of managers charging performance fees.

MIFID II

  • Managers were uncertain or expected no change on the overall costs with the introduction of MiFID II1;
  • Managers have been forced to reassess the quantity of research they source from investment banks or brokers. We see some managers (18%) looking to decrease their reliance on external research providers and aim to increase their in-house research capabilities.

Market Performance Summary:

STRATEGIES

  • Across the 91 multi-asset funds we are tracking, many share similar investment and volatility objectives, but employ different strategies;
  • In terms of the number of funds, the largest portion of market players (c. 35%) are Dynamic Asset Allocation funds, which are not required to hold specific asset classes due to the presence of a strategic benchmark and can adopt tactical/active asset allocation to invest in a broad range of growth assets;
  • However, in terms of AuM, the largest percentage of the assets are invested in Absolute Return strategies (c. 40% of overall market AuM), which aim to deliver a positive return in all market conditions through holding both long and short positions;
  • We have seen growth in Risk-Diversified or Risk-Balanced strategies (c. 20% of overall market AuM), which allocate assets across investment strategies based on individual risk budgeting for each asset class/holding. They typically target a specific risk level;
  • Passive/Strategic allocation funds (or balanced funds) account for about 16% of the overall market AuM; these funds allocate around broad asset allocation limits.

PERFORMANCE

  • Most multi-asset funds target outperformance of inflation/cash plus 3%-5% over the medium term (i.e. three to five years). As of Q2 2018, two thirds of the funds (65%) had achieved their stated investment target respectively, averaging a 3-year annualised absolute return of 5.6%;
  • More recently, multi-asset funds overall have produced disappointing performance, posting an average 1-year return of 4.1% and YTD return of -0.3% as of Q2 2018;
  • Over the past three years, the passive/strategic allocation funds have posted an average annual return of 9.0% outperforming the other three DGF categories namely Absolute Return, Dynamic Asset Allocation, and Risk-Balanced Allocation strategies;
  • The DGF universe is not homogeneous. Actual performance dispersion across DGF funds has been significant. Over the same 3-year period, the dynamic asset allocation and risk-based allocation funds returned 5.5% and 5.6% respectively, while the absolute return strategies have been the worst performer overall, generating 3.1% p.a. on average over the same period;
  • Notably, in the last two years, absolute return DGFs have underperformed the overall multi-asset market (4.2% vs 6.9% p.a. on average), as these managers have struggled to generate alpha;
  • Due to the large performance dispersion, it is important to ascertain the type of multi-asset funds in which investors are investing (namely, passive or active, long only or long-short, capital asset allocation or risk based allocation etc.), what the correlation to equities and bonds is, and to seek evidence of appropriate skill where managers claim to add value e.g. asset allocation/manager selection etc.

OUTLOOK

  • The broad market consensus seems to indicate that we are approaching the end of the interest rate cycle and the end of the benign environment for risky assets (equities in particular), and as such, the ensuing market impact and volatility could make it difficult for risky assets to achieve returns that exceed inflation or cash. This could provide opportunities for multi-asset funds, especially DGFs to outperform other strategies, provided that managers consider a wider range of return sources, enabling a higher degree of diversification.

Footnote

1 MJ Hudson Allenbridge, "Diversified Growth Funds – doing a good job?", http://www.allenbridge.com/wp-content/uploads/2016/02/Perspectives-DGF-FINAL-2-Feb-2016.pdf

2 MJ Hudson Allenbridge, "Systematic Factor Market Review Q4 2017", https://www.mjhudson.com/assets-systematic-strategies-doubled-last-three-years-according-mj-hudson-allenbridge-survey/

MiFID II does not allow research to be bundled together and a separate account must be used to purchase these services.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions