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Strict multi-asset funds consistently outperform flexible peers

Multi-asset funds with strict mandates were able to outperform their more flexible peers last year, S&P Capital IQ Fund Research shows.

The group’s latest asset allocation sector trends paper notes that fully flexible asset allocation funds should have been expected to perform better during 2012, as the controlling risk exposure in the first half of the year and taking more risk in the second half was “key” to improving performance.

However, its figures show that peers whose asset allocation is constrained by their mandate tended to display better performance.

For example. funds in the global neutral in euro peer group returned 8.9 per cent in 2012 while those in the flexible peer group returned just 6.7 per cent. Likewise, multi-asset portfolios in the global neutral US dollar peer group returned 8.7 per cent compared with the 8.4 per cent delivered by the global flexible US dollar funds.

S&P Capital IQ Fund Research says: “The consistent underperformance of flexible multi-asset funds – defined as funds that can invest their portfolios anywhere from zero to 100 per cent in risk assets – may be due to the influence of political news reducing the reliability of both fundamental and technical asset allocation tools.

“Furthermore, many flexible and defensive funds held gold as a protection against inflation risk, which served to drag further on performance.”

Within S&P Capital IQ’s sterling-denominated peer groups, medium-risk multi-asset funds – which comprise balanced and neutral peer groups – tended to outperform defensive and aggressive funds in 2012.

Asset allocation balanced was the best-performing peer group last year, with returns of 11 per cent compared with 10.9 per cent for the sterling aggressive peer group and 7.5 per cent for the sterling defensive peer group.

“In general, the medium-risk peer groups tend to have a lot of exposure to fixed income credit, while defensive funds have more government bonds and cash and aggressive funds have more equities,” the study notes.

Charles Stanley Direct head of research Ben Yearsley says: “These sorts of things can happen when polical uncertainty impacts on investment returns.”



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