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Multiasset strategies victims of their own success

Hani Redha said some investors are dropping the strategies after starting on a path to cut risk.

Some see business waning after client's goals achieved

Multiasset strategies and managers seem to be suffering, whether it's due to their own success or poor performance, however, has sources split.

These strategies had been growing in popularity over recent years, with many money managers jumping on the bandwagon and creating these go-anywhere investment vehicles.

Data provided by EPFR Global show all balanced strategies tracked by the firm recorded $31.6 billion in net outflows year-to-date through Nov. 14, compared with net inflows of about $21 billion for 2017. All total-return strategies recorded net outflows of about $10.3 billion for 2018 through Nov. 14, which followed net inflows of around $50.7 billion in 2017.

Some money managers are open about the fact that they have seen multiasset business reduce — albeit for good reasons, they said.

"We are seeing clients saying 'thanks very much, we are done,' " said Hani Redha, London-based multiasset portfolio manager at PineBridge Investments LLC. "(They are) gliding toward derisking, a more (liability-driven investment) path. So we see them walking away from multiasset. They partially redeem and derisk. The strategy is quite high growth; it's hard to see a client walk away,'' he said.

But if that happens, it's because the managers have done their job and he's fine with that. The multiasset team runs $13.1 billion. In 2018, PineBridge multiasset will have positive net inflows, according to information from the firm.

Kishen Ganatra, London-based European strategic research director at Mercer Ltd. in London, said there are two stories playing out in multiasset flows.

He said it is first important to break multiasset into two buckets — core and idiosyncratic. "With core you have almost an all-in-one portfolio — equities, bonds and some alternatives. The typical point of it is to be an all-in-one solution for a small client, managing their whole growth portfolio," Mr. Ganatra said.

These strategies can form part of a defined benefit fund portfolio or the default fund for a defined contribution plan.

"Idiosyncratic is more about low exposure to traditional markets — equities and bonds — and adding idiosyncratic and more relative value or hedge fund-type (assets) to act as a diversifier to a portfolio." He said these typically form part of a fund's alternatives allocation.

He agreed with Mr. Redha that derisking has created a speed bump for core strategies. "The core space has struggled recently, especially in DB land, as investors are derisking (and have) less need to hold these traditional market exposures. They are coming out of growth assets, maybe out of core (diversified growth funds — another name for these types of assets) and going more into matching assets."

He said that is less true for idiosyncratic strategies.

'Still see a role'

And Sorca Kelly-Scholte, head of Europe, Middle East and Africa pension solutions and advisory growth at J.P. Morgan Asset Management (JPM) in London, said: "Many of us still see a role for multiasset, and particularly going into late cycle we feel some clouds may be gathering on the horizon — quite when they will break is never clear. (Investors) still want some nimbleness."

She said any rethinking of multiasset allocations might be investors learning from experience and thinking about how to incorporate the strategies into their portfolios.

However, other sources were more skeptical of the reason for a slowdown and in some cases outflows from multiasset strategies.

"It's true that for some very large schemes they have been going full-on into (cash flow-driven investing) or are expanding LDI," said Nikesh Patel, head of investment strategy U.K. at Kempen & Co.'s money management business in London. "However, for the schemes that were using DGFs and multiasset products, the primary reason for coming out of them was disappointment — they have failed to deliver equity-like returns," although they may still have delivered returns at a promised two-thirds volatility. "Having suffered and paid for that disappointment, they have decided there are much more interesting things rather than giving (asset allocation) over to a black box."

Mr. Patel said private assets in particular, both equity and debt, have benefited at multiasset's expense. Investors "haven't entirely lost the need for return, but have just said multiasset is not the way to get it, (and there are) other more reliable ways to get it."

He said the performance point is particularly true of go-anywhere multiasset strategies, and not so much of multiasset credit strategies. Multiasset credit strategies have "seen a really dramatic rise in assets — and still are gathering more."

Jonathan L. Doolan, Frankfurt-based principal and head of Europe, Middle East and Africa at Casey Quirk, a practice of Deloitte Consulting LLP, is also skeptical. "That large swathes of plans have managed to close their funding gaps to a narrow-enough band that they can move truly to derisking their portfolios — either through pensions risk transfer or bonds — in the U.K. and U.S. is a dream to me. The gaps are still quite significant and to say people have used multiasset like they were meant to use global equity or private equity or hedge fund capabilities and were able to close that gap and derisk just seems off to me."

Rather, Mr. Doolan thinks "the real story is conviction in the asset class (has gone). Significant outflows (in some cases) — the reality is it's performance related. It was a really complex asset class to hold."

Also the institutional side of the business is seeing increased competition from outsourced CIO and other more tailored offerings.

Different benchmarks

Performance of multiasset strategies is difficult to analyze and compare because of so many different benchmarks. But some managers have referenced challenging performance in financial updates.

In its half-year 2018 update, Standard Life Aberdeen, the parent firm of investment manager Aberdeen Standard Investments, said its Global Absolute Return Strategies Fund, which had about 15 billion ($19.5 billion) as of Sept. 30, experienced net outflows of 5.3 billion for the six months ended June 30.

"While GARS performance is behind benchmark over one and three years and behind its target over one, three and five years," the update said, "it has continued to operate within the targeted volatility range, which is a key element of its design."