Fitch Ratings has warned European multi-asset funds they need to rethink their asset allocation and market timing.
In a report published last week, the ratings agency says “volatile markets without clear trends” have impaired tactical asset allocation, with fund diversification suffering from a rise in asset class correlation.
According to Fitch, average returns in the Lipper Global Mixed Asset category meet investors’ expectations and asset liability requirements over three years, but fall significantly over five years.
It says: “Surprisingly, flexible allocation funds that have larger latitude in their investment decisions and have been doing particularly poorly on average.”
The ratings agency claims the lack of positive risk premium in equity markets since 2007 has been detrimental to long-term strategic asset allocation for multi-asset funds. It also finds investors “increasingly scrutinise” strategic asset allocation strategy to match objectives and look out for more low-risk and income oriented products.
Fitch says fund managers have started to rethink the portfolio construction process and consider “more efficient risk budgeting to protect themselves from undue risk consideration”.
However, it warns that rule-based portfolio rebalancing is intentionally dependent on past volatility and allocation weights towards fixed-income assets would put funds at risk should global interest rates reverse.
It calls for a qualitative overlay to capture structural changes and market overreaction.
The report says: “Fitch believes risk-based allocation is no panacea but can add to style diversification among investors’ portfolios. Managers with a blend of qualitative and quantitative approaches seem best positioned to meet allocation and market timing challenges in multi-asset funds.”
Hargreaves Lansdown investment analyst Rob Morgan says: “Clearly the problem many multi-asset funds faced in the past was they though they were not correlated in the tough times in 2008 and 2009 and they clearly were. It is hard to defend in all conditions and many models are backwards looking.”