Multiple choice on offer for planners
Financial planners thinking of running their own multi-asset or multi-manager products are most likely on a hiding to nothing and are more likely to do themselves and their clients out of time, money and investment returns, according to the providers of multi-manager products.
Cynical planners would most likely reply with, ‘they would say that!'
Yet it is a question worth asking - why pay someone else to manage managers or manage a basket of assets - particularly after the tough conversations financial planners had to have with clients during 2008 and 2009 about the losses many of those managers generated.
BT Financial Group chief investment officer, Patrick Farrell, admits that planners faced some tough questions in the wake of the global financial crisis (GFC). He said this is no reason to abandon managed funds and that multi-manager funds have actually benefited from a reassessment of how to avoid risk in the event of another global downturn.
"One of the biggest take-outs from the global financial crisis was that many alternative investment funds did as poorly as equities," Farrell said.
"What came out of this was that clients have been asking for greater access to yield and income funds, but we asked them what they expected in terms of returns. We found they wanted CPI (consumer price index) plus a return and we have had to consider how to achieve that if we go through the events of 2008 again."
Those events, despite being a part of history, are still informing current views, with IOOF portfolio manager for strategy and international equities Stanley Yeo stating that it reset many expectations as well as approaches to investing in a multi-manager environment.
"Where there is a difference is among managers who have opted to use or take on a dynamic asset allocation approach and are now using models that move more aggressively between asset classes." - Julian Robertson
"In stressed environments all correlations go the same way and in the GFC in particular we saw a breakdown in correlation models where bonds become the only asset that had negative correlations."
"This still applies but bond yields have been low and while managers still see the need for bond exposure there has been a greater focus on asset allocation over the past five years," Yeo said.
According to Yeo the general lower levels of returns, not just in bonds, has led to a reassessment of what assets should receive investment and what asset allocation models will be used, an area which is critical for multi-manager funds.
However, the deeper change that has gone on within multi-manager funds has been below the surface, with Morningstar senior analyst Julian Robertson stating that while managers are still talking about risks, returns and correlations, conversations are now also focused on asset allocation.
"Traditional models using those measures are still key drivers for many managers who continue to operate a strategic asset allocation (SAA) approach so it would appear there is not much difference in multi-managers in that area," Robertson said.
"Where there is a difference is among managers who have opted to use or take on a dynamic asset allocation (DAA) approach and are now using models that move more aggressively between asset classes. This is part of a play to minimise risk and requires far more flexibility than the SAA approach."
What this means, according to Robertson, is that managers have moved from plain vanilla SAA models to the next level of tactical asset allocation and DAA, which is actually an evolution of protection strategies against downside risk.
Yeo said this shift is evident in how managers are seeking alpha and beta with stock specific investments focused on alpha and smart beta indices starting to be used in place of asset class based investments.
"Pure alpha is what investors should be paying for and managers have been forced to consider their costs and constraints and have developed away from selling smart beta as alpha, which has occurred in the past, because we now have a better understanding of what should be considered alpha and beta," Yeo said.
Farrell said after the hard conversations conducted by advisers, fund managers offering multi-manager funds had the onus to provide solutions that mitigated losses.
"How are we to provide returns and protection at the same time was the question for us as a manager in the market. It is why we are being used by advisers and their clients," Farrell said.
While this did not mean having to necessarily look at other asset classes, Farrell said it did mean looking at other strategies including absolute return and hedge fund strategies that promoted even lower levels of correlation.
"We are looking for idiosyncratic returns and the aim has been to find a process that avoids the performance problems of equities and alternatives that we saw in the GFC.
"Investors are in unique market conditions at present and multi-manager portfolios will need a high degree of flexibility. Long-term market returns is not a position that will not work in these markets and short to medium-term prospects need to be considered," Farrell said.
Read part two of Jason Spits' report on multi-manager funds: Pay once for many happy returns
Read part three of the multi-manager funds report: Planners reassessing multi-manager use
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