A recent paper that claims more than £22bn is languishing in multi-asset funds that have underperformed peers has been met with scepticism from wealth managers for being too narrow in its focus.
The paper published by Asset Intelligence, The Great Multi-Asset Reset, found more than 14% of the £155bn invested across the three Investment Association Mixed Investment sectors have delivered “consistent long-term underperformance”, defined as consistently sitting in the third or fourth quartile over three, five and 10-year periods.
It found between 2013 and 2020 there was £30.2bn “languishing” in third or fourth quartile products over consecutive five-year rolling periods.
It also showed that of the £60bn invested in the IA Mixed Investment 20-60% sector, £12bn has remained in the third and fourth quartile over three, five and 10 years, while £9.2bn of the 40-85% sector’s £78bn assets has lingered in the bottom half over the three time frames.
Too much downside capture
The research also found that the average fund in the IA Mixed sectors is far better at capturing the downside of global equity markets than the upside. Over the past five years, the 40-85% sector captured 83.6% of the downside of the global index, but only delivered 51.5% of the upside, according to the report.
“Despite their widespread popularity, many multi-asset funds are not performing as might be expected,” says report author and journalist Guy Shone. “The simple truth is that they don’t deliver sufficient growth when markets go up, and compound this by failing to preserve capital when markets go down.”
It said that at the heart of the problem is a labelling issue, in part due to the IA sector definitions which only categorise funds by their exposure to equities without acknowledging other assets which may behave like equities.
Fairview Investing founder and investment consultant Ben Yearsley thinks the problem is one of flexibility.
He says: “Some funds have total flexibility as to their asset allocation whereas others don’t. If your bond allocation, for example, is fixed, then the last year will have been very tough.”
Using IA sectors alone is ‘pretty meaningless’
Seven Investment Management senior portfolio manager Peter Sleep (pictured) says looking at funds solely through the prism of the IA sectors is “pretty meaningless”.
He adds: “The IA sectors are very blunt tools. The funds that do well tend to carry the most equity. So, for instance in the IA sector 40-85% equity a fund with 85% equity appears to do a lot better than a fund with 40% equity even though they sit in the same sectors.
“If you want to be top of the sector then hold 85% equity, with all the equity market volatility that entails, but if you want to serve risk averse investors who want lower returns with less volatility then you might have only 40% equity and 60% bonds.”
He adds: “Regardless, these two funds are treated the same way by this survey.”
Correlation issues
According to Asset Intelligence one issue is that assets do not always behave as they are supposed to, particularly in times of stress.
Shone used the example of high yield and emerging market debt, which co-exist in the bond dimension and are therefore considered to be defensive assets, but evidence shows they correlate to equities, particularly in periods of market stress.
He says: “Many multi-asset funds include many different asset classes and in good times when equity markets rise, these assets behave differently, diversifying portfolios when it is least needed. But in bad times, when equity markets crash, all these assets fall in tandem with equity markets, and diversification disappears when it is needed the most.”
Domestic bias
Another issue highlighted by the report is the predominance of UK equities compared to the MSCI ACWI index meaning that “many funds have not been optimised to deliver the best risk-adjusted returns”. It found that too much home bias harms returns.
For example, the UK makes up 3.81% of the MSCI ACWI Index, while the IA Mixed investment 20-60% sector has a close to 30% weighting towards the UK. UK equity makes up around 20% of both the IA Mixed Investment 0-35% and the IA Mixed Investment 40-85%.
Underperformers
The main underperformers in the IA Mixed Investment 0-35% sector over five years were identified as the Thesis Libero Cautious which returned 11.7%, the EF New Horizon Cautious fund which returned 14.9% and the EF New Horizon Income returned just 15.2%, compared to the IA Mixed Investment 0-35% sector average of 22.39%.
| IA Mixed Investment 0-35% | 5 years |
| Thesis Libero Cautious | 11.66% |
| EF New Horizon Cautious | 14.94% |
| EF New Horizon Income | 15.20% |
| DMS Stirling House Monthly Income | 17.02% |
| VT Momentum Diversified Cautious | 17.37% |
Source: Asset Intelligence
Meanwhile, the IA Mixed Investment 20-60% had an average return of 32.10% over five years, with the worst performers including the VT Garraway Multi Asset Balanced which returned 8.07%, the 8AM Cautious which returned 14.25% and the Virgin Bond Gilt UK Share returning 15.15%
| IA Mixed Investment 20-60% | 5 years |
| VT Garraway Multi Asset Balanced | 8.07% |
| 8AM Cautious | 14.25% |
| Virgin Bond Gilt UK Share | 15.15% |
| T Bailey Fund Srvs Doherty Distribution | 15.48% |
| UBS Multi Asset Income | 18.76% |
Source: Asset Intelligence
Among the bottom performers on a five-year basis in the IA Mixed Investment 40-85% sector were the Jupiter Distribution and Growth which returned 12.79%, the VT Garraway Multi Asset Growth returned 16.10%, the Fidelity Moneybuilder Balanced returned 19.11%, compared to the sector average of 47.04%.
| IA Mixed Investment 40-80% | 5 years |
| Jupiter Distribution and Growth | 12.79% |
| VT Garraway Multi Asset Growth | 16.10% |
| Fidelity Moneybuilder Balanced | 19.11% |
| Optimal Multi Asset Opportunities | 20.31% |
| EF 8AM Balanced | 23.54% |
Source: Asset Intelligence
‘Not everything can be in the top two quartiles’
However, Sleep argues that these underperforming funds may not be as big a problem as the report portrays.
He says: “Not everything can be in the top two quartiles. By definition, half must be in the bottom two quartiles. The difference between second quartile and third quartile is often only basis points, so I would not necessarily describe money as ‘languishing’. One good month could propel that fund into the second quartile or even the first quartile.”
He adds: “For these reasons I think that some funds that are in the bottom half of these sectors are probably perfectly fine, and they are achieving what their investors ask them to do.”
Similarly, Yearsley says investors must consider different mandates.
“A fund’s objective could be to beat inflation first and foremost, therefore has it really underperformed if it hasn’t kept pace?
“As with every fund, it’s about looking at performance versus benchmark and objectives not just what everything else has done.”
