Managers strive to stand out in a sector full of similarities
Money managers are working hard to differentiate themselves in what has become a crowded market for multiasset strategies and offerings.
Institutional assets under management tracked in eVestment LLC's global balanced/tactical asset allocation universe hit $813 billion as of Dec. 31, flat for the year but up almost 20% from Dec. 31, 2015.
And it remains a popular asset class — institutional net inflows in the three months ended Dec. 31 totaled $2.8 billion, showed the data.
The market cycle is providing one opportunity for managers to differentiate themselves.
"I think what (clients) are concerned about is what happens to equity markets, and what will therefore happen to their multiasset holding," said Sara Rejal, global head of liquid diversifying strategies at Willis Towers Watson PLC in London.
Ms. Rejal said the firm in recent years has been calling for recognition of the amount of equity risk in portfolios — not necessarily from equities themselves, but from other exposures that carry equity-like risk.
"We were really concerned (we were) seeing growth but not any innovation from the managers" in terms of their multiasset and diversified growth fund offerings, she said. Ms. Rejal said that also led to questions over why clients needed a multiasset portfolio, when all they seemed to be getting was equity-like exposure.
"We were hoping two years on we would see some innovation — but we're quite disappointed we haven't seen that," she said.
But some money managers have recognized the need to diversify the risk in their portfolios, differentiating by splitting out various risk factors that they are exposed to — something that is all the more important as market volatility makes a comeback.
"We have seen investors ... really looking to diversify away from equity and bond risk," said Ilya Figelman, Boston-based senior vice president and director, multiasset strategies at Acadian Asset Management LLC. "Even though asset allocation has become more sophisticated," moving away from the traditional 60% equities, 40% bonds balanced portfolio that was popular for decades, "if you decompose the risk, a lot comes from equity beta and some from bonds … that's been actually really good for investors until February this year — having a lot of equity and bond beta has been a tremendous tailwind," he said.
However, "this mentality has started to change with the February market turbulence," as inflation concerns started to bite, interest rates began to increase and central banks indicated monetary policy was about to get a whole lot tighter, he said.
Acadian, which launched its first composite strategy in November, invests in 100 return-driving factors across five sectors — equities, bonds, foreign exchange, commodities and volatility. "We have a to-do list because we're systematic. We are able to combine more than 100 ideas — those are uncorrelated on average and, more importantly, are uncorrelated in periods of market stress," Mr. Figelman added. Acadian's Multi-Asset Absolute Return Strategy has $25 million in assets under management.
'Buckets' instead of asset classes
Also doing away with asset class labels is Schroders PLC, where Alastair Baker, co-manager of the Multi-Asset Total Return fund, said the team focuses instead on three "buckets" when it comes to creating portfolios. The strategy has about £1.2 billion ($1.7 billion) in assets under management, and Schroders runs £98.8 billion across multiasset strategies. Those three are return-seeking factors, where executives right now have a focus on emerging markets debt and have more recently introduced commodities into the mix; risk reduction, which has to be thought of "in a way that doesn't hedge ourselves out of return ... where, in the event markets are more volatile than we expect, we have something in the portfolio that can stabilize"; and diversifiers, said Mr. Baker.
The diversifying part of the portfolio "recognizes that under the surface of markets, outside equities and bonds, other risk premia play out," he said. Momentum strategies are particularly complementary here, he said. "We try to incorporate these more hedge fund-like strategies into a portion of the portfolio."
This work to move into increasingly diversified asset classes for multiasset has not been for everyone, however.
Vanguard Group Inc. in the U.K. has differentiated itself by keeping things simple. The firm's target-date retirement funds have $623 billion in assets under management. "Everyone has thought that multiasset funds are the new silver bullet, reinventing the old balanced fund to try to drive … clients into higher-fee investment solutions," said Will Allport, senior retirement strategist in London. "We spend a lot of time questioning whether or not those … have actually delivered better returns, better outcomes for clients."
Mr. Allport and the multiasset-focused team believe transparency is the most important part, "rather than on a short-term basis shifting assets around. It is questionable whether that delivered long term," he said. An example of this simplicity comes in the form of one of the U.S. strategies, which invests in U.S. and international equities, U.S. and international bonds, and short-term Treasury inflation-protected securities.
However, Vanguard executives are "conscious of investors' desires for greater diversification," Mr. Allport added.
To that end, Garrett Harbron, investment analyst at Vanguard, also in London, said diversified asset classes are also considered.
"When we look at multiasset funds, or any investment ... we have to be convinced of (it) before it is included or we change our allocations. We have to be convinced there is a compelling investment rationale for including that asset class ... not just because it is the hot thing and to include a buzzword in marketing material," Mr. Harbron said.
However, simplicity also presents them with a challenge, Mr. Harbron said. "One of the challenges we face when we go into these meetings with pension professionals is to show them it doesn't have to be complex to work well. Once we make that case and explain why we feel that way and build our funds the way we do, they get it," he said. That's particularly true on the defined contribution side, "where we're seeing more and more trustees and consultants become worried about the lack of transparency in their default funds," Mr. Harbron added.
Macroeconomics at play
Money managers are aware that multiasset portfolios have needed to evolve, not only to differentiate themselves but to keep up with client demand.
"We've gone from version 1.0, which was the classic balanced fund that became (diversified growth funds) with a 60-40 stock-bond mix; to a second generation seeking to be more absolute-return oriented and less sensitive to market movements," said Erik Knutzen, chief investment officer of multiasset class, which runs $62 billion in assets at Neuberger Berman in New York. "And now we're moving onto a third category where I think we're trying to respond to expectations around the future of markets."
He said Neuberger clients have asked for portfolios with less dependency on traditional beta sources — a demand that carries important implications for money managers.
This demand highlights "the importance of being more tactical or nimble to add additional sources of return (and of) identifying and systematically capturing additional uncorrelated sources of return. And the third key component and what will be needed going forward will be a more thoughtful approach to risk management. The traditional mean variance-approach is going to suffer from meaningful limitations because it tends to lead you toward loading up on certain risk premia ... and doesn't necessarily create sufficient or proper diversification," Mr. Knutzen added.
He said there is also a need for the ability to provide "customized outcomes."
Picking out the good ideas
Managers are not only using multiple sources of risk factors to differentiate themselves, but also multiple sources of ideas.
Schroders' Mr. Baker said that the core multiasset team "sits on top of (the multiasset investment) platform, the magpies of multiasset — we pick out the good ideas and incorporate them into the portfolio." That means drawing on other parts of the firm, in particular for help incorporating macroeconomic views into portfolios.
Neuberger Berman draws on a systematic model that generates one-month expected returns for markets, developing and implementing positions based on quantitative tools.
"At the same time, we develop views based on more fundamental views across the platform, with a six- to 18-month time horizon. These views can be different or complementary," Mr. Knutzen said. That means drawing insights formally and informally from across the investment platform at Neuberger Berman — from "hardcore quants to more fundamental folks," also incorporating environmental, social and governance views into portfolios.
"We like to say managing a multiasset credit portfolio here at Stone Harbor is the ultimate team sport," said David Torchia, portfolio manager, multisector strategies/investment grade at Stone Harbor Investment Partners in New York. "It literally involves the entire investment organization."
And while Goldman Sachs Asset Management takes a risk-budgeting approach that is based on factors, the firm also has worked to be different, said Shoqat Bunglawala, London-based head of the global portfolio solutions group for Europe, the Middle East and Africa and Asia-Pacific. "The way we sought to differentiate ourselves is we think in the same way (you should be) thoughtful about diversifying your long-term portfolio, you should also diversify your active management. So taking the macro environment into account when applying top-down views, and then adding bottom-up equity and credit selection; but being purposeful and discriminating between the relative richness around where in the equity and credit space we seek additional alpha," added Mr. Bunglawala.
Different types of strategies
There also has been the opportunity for managers to differentiate in terms of the types of strategies they offer to different clients.
Russell Investments advocates "customization" in multiasset to satisfy client outcomes and fee budgets, said Rob Balkema, portfolio manager, multiasset solutions, in New York. Russell Investments has more than $137 billion in multiasset solutions assets under management. "To achieve this level of customization requires experience in both consulting and asset management. Firms that have both, like Russell Investments, can differentiate themselves by offering all three elements of true multiasset investing to clients: an asset allocation that focuses on specific investor outcomes; precise exposures from a wide and deep array of asset classes, factors, styles and managers; and dynamic portfolio management," he said.
Mr. Balkema added there has been innovation in multiasset for tax-sensitive investors. The firm has developed tax-managed equity strategies "with a unique implementation structure in which subadvisory managers submit model portfolios to us on a weekly basis without doing any trading. We collect their portfolio ideas and weights and then dynamically manage the total fund with our preferred positioning," he said.