Multi-asset funds have come a long way in the UK. Balanced funds employing static asset allocations dominated the scene during the 1990s and early 2000s. However with time, the sector evolved as there was increased demand for asset allocation to be performed within a fund. The success of a number of managers in navigating the financial crisis was surely the finest hour for active asset allocation and a great endorsement for the sector as a whole in addition to those skilful managers.
These days, we see a large spectrum of multi-asset managers within the UK and indeed a different name applied to a large part of the group. The term ‘DGF’ has emerged within the parlance though admittedly the description is rather vague. We see the DGF universe ranging from balanced funds, whose popularity is undoubtedly waning, to vehicles using dynamic asset allocation in various shades.
Within those funds employing dynamic asset allocation, one can get more granular still. We observe some managers tilting the portfolio from a neutral benchmark (what we term ‘dynamic allocation’ funds), often flooring a minimum equity exposure at around 30% of the whole portfolio, to those that are ‘benchmark-free’ and willing to swing the portfolio around much more (‘total return’ managers). This latter group does have more variation in performance between managers though arguably this flexibility allows these managers to be better-placed to deliver an outcome (say, cash + 5%) rather than a quartile ranking.
The newest group of DGFs come under the shell of what we term ‘absolute return relative value’. Though Standard Life Investment’s Global Absolute Return Strategies (commonly referred to as ‘GARS’) has been in existence for nearly a decade, we are seeing other managers emerge in this area only much more recently. For these strategies, the focus on risk allocation (rather than asset allocation) and tighter risk management form an integral part of the investment process.
This last category ventures into the territory of global macro hedge funds, which similarly employ a range of long and short relative value positions while utilising options and other derivatives. Indeed we see increased competition between DGFs and hedge funds going forward. The battle is likely to be fought in the crucial areas of skill, fees, capacity, transparency, appropriate vehicles and client servicing, though the real winner should be pension schemes and other investors who will be able to access more efficient investment strategies at lower costs.
The convergence theme plays out in other multi-asset approaches. A style of multi-asset investing we continue to support is risk parity. While risk parity has become a firm part of the landscape in the US, it has yet to take off in a major way in the UK though significantly a number of UK-based managers have recently launched strategies in this area, including both traditional (long-only) fund managers and hedge fund managers.
In the future we see a number of multi-asset approaches existing simultaneously. However, universally there will be a greater focus on risk and outcomes. We welcome these developments and believe that going forward diversification by approach will become just as relevant as diversification by asset class.
Figure 1: Classifying the multi-asset universe
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