Skill, or just luck?
With limited time horizons over which to judge multi-asset strategies, it is difficult for investors to ascertain which managers have hit targets as a result of manager skill, and which just got lucky. Axa Investment Managers global head of consultant relations Tim Gardner says appropriate asset allocation is a difficult job and given the plethora of mangers in the market, there is bound to be an element of good fortune behind some of the positive performance.
“There are very few managers who can cope with evening out the return on a shorter time horizon. The cynic in me worries that there are more managers that are doing [multi-asset strategies] than have the skill. Some of the successful [DGFs] are run by fund managers who have that skill, but there are some around where the managers just got lucky,” Gardner says.
Separating the fortuitous managers from the skilful is not the only challenge for investors looking at this market. Since there are myriad ways to skin the DGF cat, comparing multiasset strategies is difficult. Some managers come at the fund from a defensive position, assuming a starting point of 100% cash investment and gradually adding risk. For others the reverse is true, starting from 100% equity allocations and gradually dialling down. And most recently complex multi-asset strategies have emerged that incorporate many small positions and act almost like hedge funds. Kaveh says: “It’s important to look under the bonnet and understand which strategies you are considering and which most appropriate; do you want equity-like funds that are diversified and less volatile or very defensive strategies that opportunistically take market positions? Or the third option where multiple strategies are in place?”
Fund managers praise consultants for understanding the nuances in DGFs and for effectively grouping similar funds at beauty parades and within tendering exercises.
Spinks says: “Consultants have done a good job in working out the styles of DGF and presenting them to trustees so that they get our style and aren’t disappointed. There is an awful lot more differentiation [made by consultants] between the styles of manager than when we started out.”
Innovation has not been thin on the ground in the DGF’s short lifetime, and already fund managers are tapping in to emerging markets’ potential. Barings, for example, launched an emerging markets strategy to access asset classes in these developing regions but who lacked the governance resources. Barings investment manager in the global multi-asset group Hartwig Kos says: “Trustees see the value in emerging markets but this kind of investment has governance challenges. After the rollercoaster ride in equities in 2008 and 2009 clients were uncomfortable with that, so the emerging markets fund gives emerging market equity like exposure with less risk.”
An unchallenged theory
There is the potential threat that a sustained equity rally may challenge DGFs as yet untested theory. Persistent market volatility over the past four years has served DGF managers well but should there be a sustained bull run on the stock markets in which DGFs would not be able to wholly participate in nor profit from, the wheels could well come off the multi-asset wagon.
Gardner says: “Looking at where equities are priced at the minute it’s not impossible [they could have a sustained bull run] but it would be a bumpy ride. Equities could give a really decent return and a lot of the other asset classes might look pretty ordinary.
“That’s not my prediction, but it is not too much in the dream world to think that. One of the things the industry has is the regret with hindsight and people forget the element of insurance and feel they paid the premium but the event hasn’t happened so why did they pay it.”
Communication then is key for DGF managers; investors must be clear that investing in a multi-asset strategy is not all about growth and that a key part of its raison d’etre is managing risk and limiting volatility through manager skill.
Diversified growth funds may have rocketed up the fund manager agenda but their stellar rise does not look set to be short-lived. An ability to offer steady returns while taking away much of the governance responsibilities sits well in today’s risk averse environment. What matters now is proving they can do what they promise and deliver for investors over the long term.
Comments