Research by ING Investment Management (ING IM) based on flow data from LIPPER confirms the overwhelming popularity of multi asset funds among investors in the recent years. Given the current environment, ING IM expects this trend to persist. At the same time, ING IM’s research reveals a number of important differences among these funds, in terms of expected returns and risks, which should be carefully considered by investors before putting their money to work.
Low growth and multiple financial crises have made investors more risk aware. In combination with the low interest rate environment this has made adaptability of fund managers, their absolute return focus and drawdown management more dominant themes for investors. Coupled with increased uncertainty in the markets, where purely behavioural factors can put pressure on asset prices, investors are seeking flexible funds with clearly defined return and overall risk objectives. Total return multi asset funds provide such characteristics and have been a popular choice among retail as well as institutional investors in the recent years.
ING IM’s analysis of LIPPER fund data has found that asset allocation funds have been the most popular category of funds among investors in Europe in 2014 so far, with inflows topping over 54 bn EUR up until September. This was also the case in 2013 when asset allocation funds attracted more than 62 bn EUR. These flows were only seconded by sales of flexible bond funds, which saw inflows of around 29 bn in 2013 around 23 bn EUR up until September 2014.
What should investors focus on?
In the face of the apparent attractiveness of the total return multi asset proposition, the investment manager is flagging that investors need to focus more on proven risk awareness of the available multi asset funds. While the return objectives of all such funds are set well above government bond yields, it is essential take into account the riskiness of these funds, typically expressed as overall target volatility. Next to this, while the ability of multi asset fund managers to digest and react to changing market environment is at the core of the multi asset proposition, understanding the degree of flexibility and robustness of these funds at the outset is also essential for investors to decide on where to invest.
How do multi asset funds differ?
ING IM’s analysis of 20 of the largest and most well-known multi asset funds registered in Europe and available only to European investors, with combined assets under management of €165 billion reveals a wide variety of returns and risk. In this group of funds, annual returns before fees over the last 3 years averaged a solid 6.6%. At the same time however, there’s great diversity in the returns of the individual funds as well as their investment approach and the amount of overall risk these funds take on to achieve their returns. While the best performing fund in this group returned 9.8% on an annual basis before fees over the last 3 years, this figure was only 2.8% for the worst performing fund. At the same time the most risky of these funds showed an annualized volatility of 8.9% over this period, while this was only 2.1% for the safest one.
To get better insight in risk adjusted returns, ING IM has ranked the group in terms of their Sharpe ratios. This is the most well-known measure of the risk-return trade-off in an investment portfolio. A higher value indicates a greater reward to taking on risk. While the average fund of the first quartile of this group of 20 funds was able to achieve an annualized return of 8.6% before fees, with a volatility of just 4.5%, resulting and in Sharpe ratio of 1.87, this measure of risk adjusted performance was only 0.75 for the average fund in the fourth quartile, implying a significantly worse trade-off between risk and return. ING IM’s own flagship multi asset strategy – ING (L) Patrimonial First Class Multi Asset – ranks above the top quartile average according to Lipper data, with a Sharpe ratio of 2.04.
Valentijn van Nieuwenhuijzen, Head of Strategy Multi Asset at ING Investment Management, says: “Multi asset strategies are proving very popular with investors and as growing uncertainly fuels the markets, they are likely to be in even greater demand. However, there is a huge variance in the asset allocation of multi asset funds and their risk profiles, which could be made clearer to investors. For example, for downside risk mitigation purposes, with our Patrimonial First Class Multi Asset strategy we keep at all times at least 50% of the fund’s assets invested in very low risk assets such as high quality government bonds and money market instruments, while invest the rest in other potentially more rewarding assets such as equities and real estate.”