Traditional long-only multi-asset funds do not fit in the investment decision process of Tri-Lake Partners, according to Arnulfo De Pala, the firm’s Singapore-based chief investment officer.
It is hard to quantify whether a traditional multi-asset fund reduces risk or adds return to a client’s portfolio, he said. Diversification is hard to figure out because long-only multi-asset funds are invested in the asset classes the portfolio is already exposed to.
Alternative multi-asset strategies, which are more similar to hedge funds, have more value in a portfolio, according to De Pala, as they do not overlap with the other products the firm allocates to.
Their expected risk and return are quantifiable and predictable, unlike those of traditional long-only multi-asset funds.
Joyce Ngan, head of fund solutions for Asia-Pacific at Deutsche Bank Wealth Management, echoed this view.
“Managers who are nimble in their strategy and who can participate in short-term factors will create better risk-adjusted returns,” she said. They can do it by raising cash for downside protection or using futures to hedge out beta, she explained.
Ngan noted that managers do not have to be “too hedge-fund like”.
“As long as you are able to consistently show how you can mitigate your downside, your return profile should still be attractive in the long-term.”
Volatility over diversification
Ngan does not look at how diversified a multi-asset fund is. “We are trying to look at the resulting effect of the return and the volatility profile,” she said.
James Cheo, investment strategist at Bank of Singapore, said that he was more concerned about how an alternative multi-asset fund is correlated to traditional assets during crisis periods rather than how diversified the fund is.
“The multi-asset funds that we want to add to our portfolio can actually dampen the volatility associated with a crisis,” he said.
Just like any other fund, fund selectors look at the multi-asset fund’s track record and the quality of its management. However, some look at other, more specific attributes of a fund.
“One of the things that we look at is the fund’s rolling returns over history,” said Deutsche’s Ngan.
She also looks at how tactical these funds are, or how they participate in the market’s upside or protect the investor against its downside.
TriLake’s De Pala looks at detractors that prevent active fund managers from outperforming the market. One of them is the fund size.
“It is one thing to work with $500m or $200m and you exercise a high conviction on your trades, but it is another thing if you are managing $20bn and try to do the same,” he said.
Fund managers who look at the valuations of their positions frequently and trade daily, would have a harder time managing a larger amount of money, he added.