A meal deal, mix-and-match, three-for-two, a family rail ticket – often when buying a selection of associated, but not the same items, you can earn yourself a discount. It is a reward for the customer taking up a range of goods that earns an income across the board for the supplier.
When it comes to multi-asset investment, however, that is not always the case.
Once known as balanced funds, offering just equities, fixed income and a smattering of real estate for good measure, multiasset funds have expanded their repertoire to offer investors a wider showcase of securities.
Responding to investor demand for a broader spread of risk, the typical multi-asset fund can hold a wide range of bond, credit and other debt instruments, equities from around the world and some illiquid assets, too. The aim is to smooth out the ride for the end investor, as one part of the portfolio should rise as another falls.
Almost every fund manager of any size has created a multi-asset investment team. Some of the largest funds in Europe are run on this risk-spreading basis.
But getting a discount for buying into a disparate group of assets? Think again – or rather don’t waste your time trying to figure it out.
Recently, multi-asset funds have come under the watch of the regulator for their charges. Far from offering a discount, the fee structure of some of these myriad multi-asset funds are murky and could be costing investors more than the sum of their parts.
Or they might not be.
The problem arises in the vehicle’s structure as it is often too difficult to tell what they are paying for at all.
In 2017, the Financial Conduct Authority (FCA) noted in its interim report on the asset management industry that although these funds are active in terms of strategy construction, some elements within them may be delivered by passive components.
Furthermore, these funds are not compelled to display through which third-party vehicle they may be accessing certain markets, meaning there could be discrepancies in what is being paid to use them.
Equally, there might not be. The regulator took the view that with such opacity around the fees being charged on all investment funds, the end consumer was unlikely to be able to make an informed choice on which would be the best option for them.
Multi-asset, acting as a microcosm of the whole investment universe, fell squarely under its view as a key area to sort out.
The FCA set up a working group, chaired by transparency campaigner Chris Sier, who not only produced a paper with recommendations for the whole industry, but launched a not-for-profit group that would allow investors to demand clarity on what they were paying their multi-asset managers.
One of the working group’s key concerns was the lack of transparency on the underlying funds that could be used by multi-asset fund managers.
Different terminology, measurement methods between companies and non-standardised reporting has only added to the mix of murkiness.
RECIPE FOR CONFUSION
Rajesh Yadav, senior manager research analyst in multi-asset at Morningstar, outlined how this part of the investment industry has ended up in such a muddle on how it creates its vehicles.
“Passive multi-asset funds using solely tracker funds have changed the landscape over the past couple of years,” he says. “Investors can buy a diversified exposure today for south of 30 basis points.”
Most notable players in the UK are Vanguard and Legal & General Investment Management, which both use their in-house ETFs.
This has put pressure on managers to create something competitive, of value – and for a relatively cheap fee. “The first way is to employ a hybrid (barbell) approach where they use passive funds in hard-to-outperform asset classes, such as US, European and UK equities and developed market bonds, including investment grade,” Yadav says. “They then complement this core with select active managers in niche and less efficient areas of the market.”
These areas typically include emerging market equities and bonds, mid-to-small caps and niche sectors – such as specialist technology – non-agency mortgage and asset-backed securities, CoCos and catastrophe bonds amongst others.
“To add non-directionality to the portfolios some managers will use of uncorrelated alternative strategies such as long/short, absolute return, risk premia and infrastructure where passive solutions are difficult and costly to implement,” Yadav says.
When looking at the huge range of asset classes – and take in to account the different funds, trusts and other vehicles to access them – it is clear to see that setting out all the underlying fees poses something of a challenge.
Another way asset managers can access a wide range of sectors, while keeping fees low and in-house, has been to create their own internal funds-of-funds, Yadav says, however, he wonders whether many have the “sufficient breadth and the quality of products/teams to build a diversified solution”.
“The jury is still out there on this,” he adds. “We see some structural limitations to these types of solutions, and would not be surprised if in due course they open up to at least start using low-cost trackers to gain exposure to certain asset classes where they don’t have internal capabilities.”
This opens the door to more third parties to keep track of. The final way is to offer differentiated products to the market, offering products that are unlike traditional asset allocation solutions in the market.
To do this, according to Yadav, some have made significant use of non-traditional and esoteric asset classes, such as private equity, risk parity or premia funds, infrastructure, listed and unlisted real estate and absolute return-type strategies, with an aim reduce directionality of the portfolios.
While these sectors are known for often producing good returns, they are not the cheapest in the sector – nor are they the most willing to open up their special sauce recipe to scrutiny.
ASSESSING THE LABYRINTH
It is this tangle of third party, new and existing underlying asset pools that has conspired to confuse even the fund managers themselves, according to Sier.
Keeping track of management, transaction, administration, currency and other ancillary fees is a challenge in itself, without even trying to explain it to the end investor.
A range of implicit, explicit, direct and indirect fees – some of which must be reported by regulatory demand, others not – serve to confuse even the most on-point fund manager. “If the multi-manager is running the underlying fund themselves, they should easily be able to get the data because it is part of the same organisation,” Sier says.
“The problem comes when you are going to a party that is not within your group; or the third party has a different reporting period to you; or if the third party is offshore and is not obliged to give data.”
Funds-of-funds that are domiciled or have underlying funds in relatively secretive locations throw a further spanner into the works of those trying to push for transparency.
In its recommendation to the FCA, the working group on fees said investors should be able to ask for and – importantly – receive this data, no matter where it might be hiding and Sier, within his new company Clearglass, has created the technology to do so.
“Pension funds ask us ‘how many layers can you go down?’” Sier says. “We can ask for as many layers as they want as it is their data.”
He has lined up several large institutional clients – including some of the UK’s largest pension funds – and is in the process of digging into the underlying data on their multi-asset funds. Due to the size of the mandates run by one of these clients, he is seeking information on at least 300 funds, just for them.
Some managers are more obliging than others to provide information.
SHINE A LIGHT
The less helpful ones should ring alarm bells, Sier says.
“If you have a manager who says they are unable or unwilling to ask their underlying funds for data, you should think long and hard about whether or not you want to carry on working with them,” he adds.
“If they cannot do it, it means they are operationally incompetent – the very essence of what a manager is, is being good at data.”
By the same token, if they, as the client of the purchased underlying funds, cannot get the data they need, why are they buying into these funds in the first place?
“How do you know they are making decisions based upon data and not just a recommendation?” Sier says.
“You want somebody who is making good, smart decisions based upon empirical evidence. If they cannot get that data when asked, it calls into question their whole process.”
Yadav says that one of the most meaningful ways a multi-asset manager can add value to the end investor is by making wider asset allocation decisions. This could, and some argue should, be clearly split out from other fees as it has a direct impact on its performance.
If they are not able to access the full span of data, it is questionable whether this value could be added by anything other than chance.
The encouraging follow-up to Sier’s story is that plenty of fund managers, if initially reluctant, have decided to embrace the opportunity to use the template he has created.
“They can finally code their systems to one standard,” Sier says. Instead of having to link into reporting software run by various consulting firms and custodians, fund managers can produce one method to report their underlying fees.
A shove from the regulator may have helped, too.
But despite signing up some large pension investor clients, Sier found hesitancy from some funds.
He says that initially some investors had been concerned that they would find something “scary” and that their consultants may demand more fees to access the necessary data. Instead, Sier’s Clearglass charges a flat, relatively low fee, per search.
“Frankly, it is also boring,” Sier says. “Choosing the asset allocation and the managers is interesting but delving through the costs is not.”
For Robin Ellison, lawyer, trustee of several schemes and former chair of the National Association of Pension Funds, echoed the views of many investors who are finding themselves with hours of extra work (and cost) thanks to additional regulation.
Ellison says he suspected there would never be perfect transparency in fees, but it was the job of consultants to keep a “gentle eye” on them.
“Knowledge of fees is sensible and may allow room for negotiation and transparency is also good. But outcomes are the key,” Ellison says. “Being careful with fees is sensible and good governance, but cheapest is not always best. Investment management is not, as the FCA considers, a commodity.”
Ellison continues to explain that the FCA’s current “mild obsession” with fees may be because it is something that can be measured unlike long-term performance, which is harder, and few have yet tackled.