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Multi-asset strategies: not drowning, waving
Until a few years’ ago, multi-asset managers were consistently delivering reliable returns with good downside awareness. However, from 2018 there was a noticeable shift towards persistent underperformance in relative-value multi-asset managers which was outside the range of expectations. Frontier Advisors has produced a paper analysing the shift in performance, underlying drivers and the way forward.
The 14-page research paper follows two years of research on the subject by the asset consulting firm. It was written by consultant Claire Casucci and principal consultant Michael Sommers. The paper illustrates how the multi-asset investing sector has evolved and what drives manager performance, including the elements of a strategy which are most likely to contribute to achieving objectives.
“Our analysis revealed that performance challenges were sector wide, rather than manager specific, and somewhat related to the market environment,” the paper says. “However, there are some key elements that demonstrate manager skill and we believe that by better understanding the specific performance drivers that lead to success, an investor is better placed to select a manager that is more likely to deliver on its target.”
Frontier believes that the performance of multi-asset managers during the COVID-19 crisis in the first quarter of this year has helped re-establish their investment credential, which had fallen out of favour. Relative value multi-asset strategies were among the best performers in the March quarter in Australia, especially compared to equities and other liquid alternatives. Most delivered a slight negative return – still beating the broader markets.
“Multi-asset strategies also provided valuable liquidity at a time when many investors needed it. Ironically, despite being good performers during the recent crisis, many relative value managers were redeemed, at least in part, thanks to their good liquidity,” the report says. “Investors would not lock in major losses by selling. Considering these valuable characteristics, we believe that positions in many multi-asset managers will be re-instated once markets normalise and investors’ liquidity needs are less urgent.”
The authors also say that, in addition, they believe that having an allocation to a discretionary manager in a portfolio can be a useful complement to a suite of systematic strategies. For investors that hold multi-asset managers in their portfolios. “For investors who are considering making an allocation, we believe that this additional level of due diligence is essential.”
The research indicates that the world has been in a market environment over the last few years that has not been conducive to multi-asset managers. It shows that the factors that impact performance have declined across the sector during this time. Nonetheless, there are some early signs of improvement, notwithstanding the challenging start to 2020. On average, the report says:
- Hit rates in 2019 were higher than they were in 2018, thanks to the US Federal Reserve’s pivot towards easier monetary policy
- There was a slight uptick in positive skew in 2019
- Managers are being more cognisant of the level of ex-ante volatility being built into their portfolios. Realised volatility was already starting to pick up in 2019 and there has been a spike in volatility in 2020 due to the COVID-19 crisis
- Overall, manager performance in 2019 improved compared to 2018, with most managers in the universe achieving their target returns. Returns in Q1 2020 show that risk has picked up and returns have generally been negative, although the returns of relative-value multi-asset managers have been closer to zero (compared to directional only managers whose returns are more closely linked with equity markets and suffered greater losses).
The report says: “Regardless of these green shoots, we will need to see a sustained period of strong performance for multi-asset to again become a high conviction allocation. However, the COVID-19 period has certainly reinforced the benefits that an allocation to multi-asset can provide, such as more resilient returns than equities, good liquidity and a diversified approach from a systematic manager. The hit rate and ex-ante volatility analysis is a standard part of our due diligence process for our manager universe.” It looks to provide manager-specific insights, while the strategies have generally performed as expected over the past two years, delivering a return between stocks and bonds, Frontier says.
(Frontier surveyed 19 multi-asset managers for their weekly returns for the six most acute weeks of the COVID-19 crisis period and compared the dispersion of returns to that of the S&P 500. The dispersion of returns of multi-asset managers was much more contained than those of equities.)
– G.B.
