Multi-asset funds in Europe have not lived up to the sales pitch of providing a buffer against unsettled markets, according to the latest The Cerulli Edge - Global Edition, which advises managers of poorly performing funds within the asset class to consider cutting fees.
While Cerulli Associates, a global analytics firm, acknowledges that some multi-asset sectors are faring better than others, its evaluation of the overall performance of the asset class over the 12 months prior to July 2016 shows that, on average, returns have been negative.
In terms of asset-weighted average returns, none of the multi-asset sectors, as defined by Morningstar, were in positive territory during the review period. Cerulli notes that a number of the funds are highly correlated to the stock market, some by up to 90%, which, given market conditions, defeats the funds' key objective of providing stability.
"The past 12 months have been tough for multi-asset managers. Overall, the asset class has failed its first real test--and investors are beginning to take note. While a single year is not enough to truly judge performance, it does serve as an indicator," says Barbara Wall, Europe managing director at Cerulli.
Average multi-asset fund fees (ongoing charges) in the UK have dropped 16 basis points in the past two years. Cerulli believes that charges will continue to fall in both the UK and mainland Europe. "More managers may be forced to sacrifice part of their fees," says Angelos Gousios, an associate director at Cerulli Associates.
He says the case for liquid alternative multi-asset funds sticking with existing charges on the basis that special skills are required no longer holds water. "Fund buyers will not hesitate to switch to less expensive alternatives if performance and risk targets are not met," says Gousios.
Noting that cheaper, more innovative strategies such as smart beta multi-asset funds are on the increase, Gousios warns that managers "charging unjustifiable performance fees in both rising and falling markets are at risk of being marginalized."
Despite Cerulli's damning assessment, the firm is optimistic with regard to the longer term prospects for multiasset funds. "Tailwinds that will increase their exposure include defined contribution pension schemes in the UK. However, inflows are likely to be more concentrated from now on, with managers that fail to deliver falling by the wayside," says Gousios.