Total inflows into multi-asset funds were a mere €2.3bn in December, down 90% from their peak last spring, according to fund flows data provided by Morningstar. Moreover, multi-asset funds (called ‘allocation funds’ by Morningstar) were the most popular asset class in Europe from October 2013 to September 2015, collecting monthly inflows that often exceeded the €10bn mark.
The multi-asset hype reached its peak in March 2015, when net inflows amounted to €22.9bn. As you can see in the chart below, fund flows have gone steadily downhill from there. Multi-asset funds lost their number one status in terms of inflows to their European equity peers in September, only for net inflows to tumble further to their lowest level in 3.5 years in December.
Not alternative enough
So why are multi-asset funds losing traction? First, it is worth mentioning that they have far from fallen out of grace. The class of funds is still the third most popular with investors. However, there is an important shift underway: while long-only multi-asset funds had always enjoyed higher inflows than their long/short absolute return peers, this is now no longer the case.
Long/short absolute return strategies such as long/short equity, global macro and multi-strategy funds gathered twice as much money as long-only multi-asset funds in the final two months of 2015. Especially so-called cautious and moderate allocation funds, which invest a lot in bonds, have fallen out of favour, seeing only limited inflows or even outflows during the final months of the year.
The exposure these funds have to a correction in the bond markets, combined with limited return potential, has led investors to increasingly consider long/short market-neutral equity and multi-strategy funds. The latter category of funds is supposedly less correlated to the investment sentiment of the day, while still targeting a return of Libor plus on average 2-5%.
Click here to see a full overview of the latest fund flows.