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Global asset allocation strategies are ‘no silver bullet’

The Morningstar EUR Flexible Allocation – Global category epitomises the trend: overall, funds in this category pocketed cumulative inflows of over €40bn (£35.8bn, $47bn) in the three years through to the end of April 2017 (excluding feeders and fund of funds). 

The growth in assets has been fast but steady. Since January 2010, these strategies have enjoyed positive flows in every single month except one. As recently as March 2017 they recorded the second-best month since Morningstar started tracking flows data, with roughly €2.4bn of net inflows. 

Daunting selection

Unfortunately, fund selection in this universe can at times be daunting. However, asset management firms have seized the opportunity by increasing their offerings in the space. The category currently counts more than 1,500 funds in total, with a plethora of young players and a decent amount of churn in recent years. 

In the five-year interval from 2012 to the end of 2016, we counted 805 fund launches and 614 terminations – that is, funds either merged or liquidated. As a result, almost one-third of the funds in the category don’t have the three-year track record required for a Morningstar rating.

The category includes funds optimised for euro-based investors that invest globally in a range of asset types. The large leeway accorded to fund managers can result in a wide range of outcomes and some degree of diversity across the constituents. This, in turn, is a reflection of the variance of approaches and management styles. 

Defying expectations

Investors look to these funds for their supposed ability to adapt to different market conditions, seeking investment opportunities across regions, sectors and asset classes. This may sound like an attractive proposition in the context of minuscule bond yields and expensive equity valuations, but performance has not lived up to investors’ expectations so far. 

Morningstar research published in March 2017, entitled ‘A bias toward European stocks has hurt allocation funds’, noted that most of these funds had difficulty beating their Morningstar category benchmarks, particularly over longer periods of time. 

In fact, over a 10-year period, the median fund in the EUR Flexible Allocation – Global category trailed its 50/50 bond/equity benchmark by a staggering 4.36% annualised in euro terms. In general, these funds have also not proved very resilient in terms of downside risk protection, and neither have they produced better risk-adjusted results relative to their category index.  

 For funds to watch in this sector, see page two.

Mark Battersby

Mark Battersby is head of content research and development at Last Word. Mark joined Last Word in February 2012, having previously worked at Citywire, Interactive Investor International, and FT Business.

Part of the Mark Allen Group.