Intelligent thinking: schemes seek the X-factor in multi-asset investments
With risk and return at the forefront of most schemes’ investment strategies, trustees hope multi-asset funds will provide that indefinable piece of alchemy to get them through tough economic times.
Multi-asset funds have been one of the few good-news investment stories of the past four years.
Multitalented teams of often youngish fund managers led by shrewd macroeconomists make incremental or strategic bets on the extreme volatility impacting markets.
Bets on safe haven currencies, gold and oversold asset classes have all helped them to by and large beat equity returns.
The new paradigm is that risk-averse investors, particularly those in defined contribution schemes, are happier saving into these funds, which lack the volatility of equities, even if in theory, they are unlikely to beat equity returns in the long run.
To gauge expert opinion on these funds we quizzed 30 pension representatives, including member-nominated trustees, pension scheme managers, leading investment consultants and fiduciary managers.
What are the qualities of a good multi-asset fund?
Skill
An ability to tactically allocate to different asset classes in response to changing valuations and market dynamics, and a solid track record of having achieved this, seem quite reasonable expectations of a multi-asset manager.
For some investors this is often typified by having expertise across a wide range of asset classes, as well as an understanding of a how these assets connect.
It was not clearly stated, but for some respondents this means the ability to access best-in-class components as well as in-house management.
Others stated a “willingness to leave an asset class with loss if not working. Not all bets win”. One said “bold asset allocation” was key. The desired qualities of a multi-asset fund will to some extent depend on the objectives of the investor, said another.
Risk
Few place risk concerns as the primary quality of a multi-asset fund, but many name it as their second. For some this is an element of capital preservation, which might be proven when equity markets are falling.
For others risk management is typified by the spread of risk in the portfolio, and some seek a process that manages risk holistically. One respondent hoped for a “degree of liquidity”.
True diversification
A good multi-asset fund is totally transparent and able to explain its strategies clearly
Investors are quick to belittle multi-asset funds that are too close to old-style balanced managed funds. They want their managers to go beyond the ordinary and find a broad diversification that some people label ‘true diversification’.
There is an expectation of an X factor, something different that cannot be purchased elsewhere. One investor simply described it as an “exposure to a range of assets, some that would not fit into a traditional pension scheme allocation”.
Others describe this in terms of a broad range of return drivers that are not equities. At the same time there is also perhaps a contradictory or unrealistic expectation that multi-asset funds should have a less volatile return stream than equities, but a broadly similar overall return.
Good communications
“A good multi-asset fund is totally transparent and able to explain its strategies to pension scheme trustees clearly,” said one investor.
This was echoed by those calling for its strategy to be simple or clear to understand, which shows that certain funds in the sector will always be shunned for their enigmatic strategies.
The reporting was also key, with several asking for it to be transparent and for performance monitoring to be “robust”. Lastly the chairman of a small pension scheme asked for fees to be at a “contained” level.
Do you favour a long-only or absolute return approach? And do you use a single manager or multi-managers?
This question was sidestepped by around half of the survey, who said they were agnostic about approaches and simply used a variety of managers as best practice.
Indeed, one consultant said most of its clients now used several multi-asset fund managers. And while many implied they used a couple of approaches, there is word in the industry of some who are starting to use up to three funds.
One investor said they favoured a mix of managers with different approaches, while another explained the reason for their diversity of managers was that “few have expertise across all asset classes”.
However, several investors did not sit on the fence.
A leading consultant in favour of an absolute return approach, rationalised: “If you trust a manager to do a good job in a multi-asset product, then why limit that manager to long-only?
“We are seeing a clear trend towards less constrained strategies and investment management agreements, and I would be supportive of an absolute return approach in a wide range of asset classes.”
A pension fund representative said: “We much prefer the absolute return approach.”
However, there were doubters. One chairman of trustees said absolute return funds seem to struggle to achieve their objective when market conditions are volatile.
To what extent is the current low growth environment a challenge to the scheme/consultant/manager relationship?
There are two schools of thought on this.
The first says that trustees, consultants and fund managers are going to have to work together more regularly.
For scheme representatives there is the expectation of their consultants and fund managers reacting to the current crises in funding and markets, and working harder.
Relationships are about working together and being proactive
“Relationships are about working together and being proactive by offering more services than you are being paid for,” said Alan Gander, representative of the £500m Lend Lease UK Pension Scheme.
“Where this has not been apparent, then we have changed our consultant.”
A member-nominated trustee of a £4bn pension scheme, concurred: “The challenge is for consultants to identify more diversification/return-seeking investment opportunites.”
Phil Page, client director at Cardano, appeared on message when he said: “The challenge is how we collectively help pension funds out of the hole we’re all in. This should lead to greater collaboration.”
But Phil Edwards, principal at Mercer, emphasised the role of everyone working harder: “Scheme/consultant/manager relationships continue to rest on open lines of communication, with the current environment arguably making a more regular discussion of the key risks to which the investment strategy is exposed and timely reporting all the more important.”
A second, and complementary approach, favours the implementation of greater risk frameworks.
In what would appear a coded endorsement of liability-driven investing, Pete Drewienkiewicz, head of manager research at Redington, said: “The current environment highlights the need to have some sort of framework in place to determine strategy in challenging times.
“It is important for the main fund managers to be aware of the scheme and consultant’s long-term strategy in a more holistic fashion, to allow them to understand the ultimate aims of the client.”
The trustee of a multi-billion-pound scheme with an LDI approach added that risk levels are required more than ever, and likewise a group pensions manager for a £500m scheme, called for closer ties between trustees and fund managers.
There were endorsements for other approaches. The chairman of trustees for a scheme that has taken a fiduciary manager approach said the current crisis encourages trustees to look beyond the traditional UK model.
Do you use multi-asset strategies as a way of increasing diversification?
Going by the answers above, it is little surprise that 85 per cent of respondents said multi-asset strategies are used as a way of gaining greater diversification.
A consultant described them as “ideal” for small to medium-sized pension plans, but recommended some illiquid asset classes to sit alongside them.
Most Viewed
- What does Labour have in store for the pensions industry?
- Dashboard costs rose by 23% in 2023, figures show
- LGPS latest: GLIL backers invest £475m for UK infrastructure push
- Border to Coast launches UK strategy in major private markets push
- How the pensions industry can better support people with mental health problems