Benchmark hugging
A further problem facing peer-group benchmarked funds is that managers, in order to control risk relative to their respective sector will often not deviate too much from the asset allocation of their rivals.
For instance, a manager may be required to hold a certain allocation over or underweight in European equities relative to their peers. This could result in a situation where a fund manager has no option but to hold client capital in a particular equity market or bond, even if they believe the outlook for that investment is poor. Constraints of this nature are clearly unhelpful. They can distort a fund’s risk/return profile over time and have no benefits for customers, whose primary concern is usually to meet a defined outcome.
Avoiding nasty surprises
The most important thing for advisers is to ensure that their clients receive no nasty surprises. A client’s journey needs to be managed carefully to reach their defined outcome. This is achieved by assessing their attitude to risk and placing them in a portfolio that matches this. The objective then becomes all about generating strong risk-adjusted returns, within a client’s risk profile, rather than peer-group comparisons.
Ultimately, the main risk investors are interested in is the risk of losing money. Newer types of multi-asset funds, such as risk-targeted strategies that help investors understand how much money they could gain in the good times and what they could lose in extremes are therefore helpful for both advisers and the end investors. In this sense, multi-asset funds must seek above all to generate the best possible long-term return within their risk parameters, and not seek to ‘beat’ a peer group with diverse objectives.
