Managers preparing for multiasset growth

Managers continue to be bullish on multiasset class strategies, particularly outcome-oriented and customized solutions, despite tepid institutional investor response of late.

In fact, some are moving to expand capabilities, believing that investors now are starting to look for more customized approaches. The growth of target-date funds in particular, a multiasset strategy, is helping fuel that optimism.

New York-based management consulting firm McKinsey & Co. Inc. projects that multiasset class strategies should experience net inflows of $1.2 trillion over the next five years.

Count T. Rowe Price Group Inc. among the true believers. The Baltimore-based manager is one of a number of firms that are beefing up their multiasset businesses. The firm has added 12 team members to its $241 billion multiasset business as of Oct. 31, and plans to add another 20 before the end of 2017.

“We went through an integrated planning process to identify priorities. So we looked at trends and strengths, and multiasset came out as one of our key priorities,” said Sebastien Page, co-head of T. Rowe's asset allocation group. He added that T. Rowe's multiasset business has grown over the last few years, and is projected to see inflows, based on the firm's research.

Of T. Rowe's multiasset business, $188.6 billion is in target-date funds.

In addition to T. Rowe, firms such as Russell Investments, John Hancock, Capital Group and Pacific Asset Management have been bolstering their multiasset class capabilities.

Jeff T. Hussey, global chief investment officer at Russell Investments, said in a phone interview that his firm continues to see growth in the multiasset arena, mainly because of the low-return market environment, pension funds seeking “more dynamic management rather than setting up guardrails” and investors looking at more esoteric areas such as local currencies or bank loans.

“We've seen 30% growth over the last five years within Russell,” Mr. Hussey said. “We're really hitting our stride in helping our clients figure out multiasset.”

Russell has recently launched new multiasset strategies and added to the multiasset team. “Investors are moving toward outcome-oriented investing and multiasset is a key part of that. It's this notion of getting closer to clients,” Mr. Hussey said.

Not all believe the optimism is warranted.

“A number of active managers are pinning their hopes on the idea that (multiasset) will be the thing that turns around negative asset flows,” said Janet Yang, director of manager research for multiasset strategies, North America, at Morningstar Inc.

She noted that managers are seeing what's happening with target date funds, which are “the one shining light for active asset management.”

Data from Morningstar show that U.S. target date funds had $857.41 billion in AUM as of Oct. 31, up 12.5% from Dec. 31. Target date funds experienced $53.72 billion in net inflows year-to-date as of Oct. 31.The Morningstar director also pointed out that a number of managers of outcome-oriented solutions are suggesting that asset owners change the way they measure a strategy's success — namely, by the outcome rather than by the benchmark.

Ms. Yang thinks asset owners should expect more. “From a total return perspective, they can do better,” she said. “If a fund meets an outcome, that shouldn't be the sole measuring stick. That measuring stick is too low. Investors should try not to be seduced. They should keep their standards high.”

Jason L. Ellement, a senior vice president and a consultant in Callan Associates Inc.'s capital markets research group, noted in a separate phone interview that investor appetite for multiasset hasn't exactly been insatiable.

“There's been a lot of discussion that's ramping up and some gradual traction. But we're not seeing major inflows,” Mr. Ellement said.

The Callan consultant added that although he's “optimistic” about the prospect of multiasset, he believes traction's been low because of investors sticking with the standard 60/40 stock-bond allocation.

“A static 60/40 has done so well over the last few years, investors may be asking why do anything different?” Mr. Ellement noted.

Data from Marietta, Ga.-based eVestment LLC show that all long-only multiasset strategies have experienced institutional outflows for the past five quarters. Looking back even further, eight of the last nine quarters saw net institutional outflows.

A number of managers that Pensions & Investments spoke with blame those outflows recorded by eVestment on a handful of large, underperforming managers.

“If you look at the data, it's more noise than trend; it's a few big players underperforming that's driving those outflows,” said T. Rowe's Mr. Page.

Open-end multiasset funds managed by Grantham, Mayo, van Otterloo & Co. LLC; Waddell & Reed Inc.'s Ivy Funds; BlackRock Inc.; and Wells Fargo & Co. experienced net institutional outflows year-to-date through Oct. 31 totaling $9.3 billion, according to data from Morningstar.

Erik Knutzen, who joined Neuberger Berman Group LLC in April 2014 as the New York-based manager's multiasset class chief investment officer, acknowledges that “there hasn't been the explosive growth people have been talking about in the multiasset class area,” particularly within standard multiasset mutual funds and commingled funds. But he noted that there has been growth in target-date funds and diversified growth funds, as well as institutional solutions, all versions of multiasset investing.

“The biggest headwind that multiasset has faced over the last year or two is that investors haven't been rewarded by diversification. This has caused investors to allocate less to multiasset or elsewhere,” Mr. Knutzen added.

Neuberger Berman had $3.3 billion in multiasset class AUM as of Sept. 30, up 14% from the same period two years ago.

Mr. Knutzen said that because diversification will benefit investors over the next five to 10 years, “we believe multiasset will continue to be a major growth area for the industry and for Neuberger Berman.”

Another firm that made a push in 2014 to expand its multiasset and portfolio solutions business continues to be optimistic. Adam Farstrup, U.S. product manager, multiasset, in Schroders PLC's New York office, said the firm has seen “a pickup in RFP activity, but movement of capital into this space is slow.”

Over the summer, the manager broke its multiasset group into two parts: multiasset and portfolio solutions. “When the groups were managed together, both were smaller. The growth has been such that it makes sense that they operate separately,” Mr. Farstrup said.