A run through of key discussions from last week’s Hot Topic on multi-asset funds

A 1-hour watch. 

Traditional static asset allocation models of 60% in risk assets/40% in fixed interest have delivered some solid results in recent times, so what does this mean for multi-asset investors who pride themselves in being more flexible in their approach?

If basic passive model portfolios are outperforming, why would an investor use a more sophisticated, and expensive, actively managed multi-asset fund?

Mark Preskett, portfolio manager at Morningstar investment management, and host of our latest Hot Topic virtual lunch on multi-asset investing, was keen to put this question to our panellists, all themselves managers of multi-asset funds.

“60/40 has done very well over the past decade because equities have done very well and interest rates collapsed pushing government bonds evermore upwards,” said Yoram Lustig, head of multi-asset solutions EMEA at T Rowe Price.

“You didn’t need to be clever; you just bought the markets and enjoyed the ride. The challenge looking forward is you need to find difference in portfolios”.

Given where valuations are presently in equities – particularly highly rated tech giants – Yoram believes the next decade is going to be more challenging and alpha from security selection and tactical asset allocation is going to be much more important.

However, he stresses that multi-asset fund providers must continue to give investors “more than what they can just build themselves” using a standard selection of retail funds.

Betting on the house

For John Roe, head of multi-asset funds at LGIM, proper multi-asset investing is in some ways like being in a casino, but the fund manager is the house.

“On any given day there will be investors that will do better than you, and they can put that down to skill, but there are also investors that will do worse than you,” he explained.

“But because of the benefits of diversification over the longer term, on a risk-adjusted basis you will do better than the average investor just like the casino does better than the average gambler. It’s just a mindset.

“You have to be prepared for that there’s always something you could have owned more of and there’s always going to be a fund that was more concentrated that did better than you. That’s the trade-off for targeting diversification”.

This year has certainly been a tough one for asset allocators, particularly during the downturn in March when correlations and beta went to one, with more or less every asset falling by 25-30% leaving nowhere to hide on a long-only basis.

Suspicious of the momentum-driven tech stocks that have been driving the subsequent rally, Niall O’connor, manager of Brooks Macdonald’s Defensive Capital Fund, sees parallels with the tech boom and bust of 1999/2000.

Another tech bust?

“There are so many parallels with 1999. Back then everyone said it’s different this time, but there’s a change in paradigm when everything is going to be done online and it’s the same today,” he said.

“In 1999 we also had falling policy rates, which we’ve also had recently. We had a cut to top personal tax rates in the US, which we had a couple of years ago as well, and tech companies spending to gain share.

“Part of the issue at the moment is we are in a very retail-driven and very story driven market at the moment. Everything is driven by narrative, particularly in an environment where few companies are expected to make a profit.

He added: “The market is very fragile. I’m not saying the bubble is about to burst, but I can’t imagine it being at these levels in a years’ time”.