Multiasset strategies could face growing scrutiny in coming years as the prospect of stingy market gains leaves institutional investors relying more on managers' asset allocation skills to pursue their targeted returns.
Recent research by investment consultants Willis Towers Watson PLC and Cambridge Associates LLC suggests such skill is an all-too-rare commodity.
That proposition has yet to be put to the test, as strong equity and fixed-income market gains since the global financial crisis generally helped managers hit their marks — often set as LIBOR or inflation plus 2% or 3% for more defensive strategies, and LIBOR or inflation plus 4% to 5% for more aggressive strategies.
That could be changing now, with markets over the past year becoming less generous and more volatile, even as net flows to multiasset managers have remained strong in Europe and the Asia-Pacific region.
According to London-based consulting and research firm Spence Johnson's Institutional Money in Motion database, net flows to multiasset strategies for the three years through Dec. 31 came to roughly $37 billion for clients across Europe, the Middle East and Africa, and $10 billion for Asia-Pacific clients.
The focus of investors now is shifting to how managers can achieve risk-and-return objectives in a market environment where the “ability to generate alpha” — via dynamic asset allocation, active positioning within asset classes and relative-value trades — could become more important, said Laura Rieber, Singapore-based senior investment director with Cambridge Associates Asia, in an e-mail.
Multiasset veterans report the same change.
Investors are paying more attention to “what our value-add is,” and active allocation skills, including dynamic and tactical asset allocation, have become an “increasingly important part of the conversation,” said Garth Taljard, head of multiasset management for London-based Schroder Investment Management Ltd.'s $110 billion multiasset business.
Growing interest in “asset allocation alpha” — to achieve “required returns ... in a low nominal return world” — is what's driving institutional investors to embrace multiasset now, agreed Michael Kelly, global head of New York-based PineBridge Investments' $13.4 billion multiasset business.
Mr. Taljard pointed to the $562 million Japan Diversified Growth Fund as one example of dynamic allocation shifts helping Schroder's multiasset strategy achieve its objectives of positive absolute returns and downside protection during the first quarter of 2016, which saw key equity benchmarks in the U.S. and Japan plunge as much as 11% and 21%, respectively. Keying on a destabilizing plunge in Chinese stocks, “we reduced our equity exposure in the first week of January to around 10%,” from 15%, which — along with a decision to buy energy stocks as oil prices stabilized — helped the fund post a 1.1% gain for the quarter, with a maximum drawdown of 1.4% along the way.
Jeffrey L. Knight, global head of investment solutions and co-head of global asset allocation with Boston-based Columbia Threadneedle Investments, said the risk-parity structure of his $1.2 billion Columbia Adaptive Risk Allocation strategy and a timely move to close the fund's underweight position in commodities helped limit its maximum drawdown during the volatile start of 2016 to roughly 3%, and post a gross first-half return of 8%.
Still, some gatekeepers warn that client dreams of active alpha from their multiasset managers could easily prove elusive.
“Our view is that (managers) will find it challenging to achieve their performance objectives if (as is widely expected) the future is an environment of depressed and volatile returns,” said a Willis Towers Watson report in March that concluded that dynamic and tactical asset allocation more often than not detracted from manager returns.