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Global asset allocation strategies are ‘no silver bullet’

While it’s no secret that passive, low-cost products are relentlessly increasing their market share, investors’ hunt for yield has also buoyed sentiment towards flexible and unconstrained mandates, according to Morningstar.

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Mark Battersby

Funds to watch – Three year performance

The list of top performers is crowded with strategies that have maintained an aggressive stance, particularly in terms of net equity exposure. Most of these also rank among the riskiest quintile of the peer group over the past three years. 

  • Deutsche Asset Management Multi Opportunities III is run by the team led by Klaus Kaldemorgen (pictured), who has been the fund’s co-manager, alongside Gunnar Friede, since 2005. As of April 2017, the fund maintained a material exposure to the equity market of around 70%. The team found opportunities in three main areas for its equity sleeve: industrials, in particular postal services providers, such as the German Deutsche Post and the Belgian Bpost; technology, Samsung Electronics and Taiwan Semiconductor Manufacturing are the fund’s top positions; and telecoms, at around 10% of the assets, the fund’s sector exposure is twice that of the average peer in this category. Meanwhile, from a geographic standpoint it favours Europe and Asia relative to the US equity market, which accounts for around 20% of the fund’s country allocation. All in all, the team has been able to ride the recent rise in equity markets quite effectively, ranking in the category’s top quintile in each of the past five calendar years. However, these results came at a cost. The strategy languished in volatile markets, as displayed by its larger-than-average losses in 2008 and 2011.

Funds to watch – newcomers

There are a host of young players in this category, with almost one-third of funds being under three years old. 

  • Kames Global Diversified Income is managed by Vincent McEntegart from Kames Capital’s multi-asset team. McEntegart has 28 years’ professional experience. The fund’s objective is to provide its investors with an annual income distribution of 5% by allocating the fund’s assets into bonds, equities, listed property, specialist income and cash. The equity exposure is limited to a maximum of 80%. Its allocation to alternative investments is significant – up to 30% of the portfolio – which sets the strategy apart from many competitors in the field. Besides property, this includes a bucket classified as ‘specialist income’ that comprises infrastructure investments, aircraft leasing, renewable energy or other assets with government or regulatory-backed revenue streams. Therefore, the fund also invests in dedicated closed-end funds. As at the end of April 2017, bonds made up 33% of the portfolio, with the majority (20%) invested in the high-yield segment, 26% in equities, followed by 18% in listed property, 16% in specialist income and 7% in cash. 
  • The iQ Global fund is managed by Werner Krieger from investment boutique GFA Vermögensverwaltung. The quantitative, trend-following approach invests in eight global markets that the manager defines as follows: US standard; US tech; emerging markets; eurozone; Germany; UK; Switzerland; and Japan. The neutral allocation is determined by the current share of the specific market’s GDP in relation to the overall investable universe. The US standard, US tech and eurozone markets currently have the highest weighting in the fund, with 14% each. The tactical positioning in every market is based on medium-term trading signals (several signals per region per year), that are generated by two different indicator groups based on market trends, sentiment, technical indicators and the market environment. While the basic portfolio consists of low-volatility and minimum-variance ETFs, the tactical positioning is implemented with futures. The exposure towards a market can vary between 200% when both indicators are positive and zero when both signals are negative. As at the end of April 2017, the fund’s equity exposure was near its upper limit. Apart from Germany, where the indicators are currently neutral, every region is weighted with the maximum of 200%.

Funds to watch – assets under management

Both FvS and Deutsche AM funds have a flexible equity exposure that can range between zero and 100%. They are managed with discretionary, top-down focused approaches. 

  • Flossbach von Storch Multiple Opportunities has been managed since launch in October 2007 by Bert Flossbach. The fund holds a Bronze Morningstar analyst rating. The unconstrained approach is a mix of top-down asset allocation and bottom-up security selection. The allocation is guided by the views developed by the FVS strategy committee, which comprises of senior fund managers and strategists. Historically, the fund’s equity exposure has ranged between 35% and 80%, and the fund typically holds physical gold (11% as at the end of May ’17, with a maximum of 25%) that is used as a hedge against disruptive market events. While Flossbach tends to favour quality companies with high and stable free cashflows, such as Nestlé or Novo Nordisk, he avoids firms with high debt and capital expenditure. He is a manger who likes to go against the grain and often buys after share prices have fallen. Currently, he holds around 24% in cash, which reflects his cautious stance as he expects more volatile markets in the near term to offer buying opportunities.  
  • Deutsche Invest I Multi Opportunities was launched in June 2014, but Henning Potstada has been running the underlying strategy since January 2009 in an institutional fund. The fund is currently a Morningstar prospect, a promising investment strategy that we believe may be worthy of greater investor attention but that is not yet covered by the Morningstar manager research team. Potstada is a senior team member of Deutsche AM’s multi-asset total-return team, led by Klaus Kaldemorgen, whose expertise we hold in high regard. Deutsche Multi Opportunities is set up as a fund of funds, which means it holds at least 51% of its assets in funds, mostly in-house products and ETFs. The process emphasises top-down allocation and risk management. Tactical positions can be implemented via derivatives. The equity exposure is flexible, since launch it has ranged between 9% and 63%. As at the end of May 2017, net equity exposure was 29%, resulting from the team’s cautious stance towards the global equity markets. Historically, the portfolio has ranged between the value and blend section of the Morningstar style box. The European bias in comparison with the fund’s category peers (currently 58% exposure vs 41% on average) is also typical for the fund. In the bond sleeve that makes up 47% of the portfolio, the manager favours corporate bonds, including 12.3% with ratings below investment grade. A further 6% is invested in emerging markets bonds.  
  • Eurizon Azioni Strategia Flessibile continues to attract strong interests in 2017, with net inflow of roughly €1bn year to date. The fund holds a Morningstar analyst rating of neutral, reflecting the absence of conviction in its ability to outperform its peers on a risk-adjusted basis and over a full market cycle. The fund follows a quant-driven process developed by portfolio manager Corrado Gaudenzi, Eurizon Capital’s head of quantitative research. The strategy aims to exploit mean-reverting patterns in Shiller’s cyclically-adjusted price/earnings ratio. The fund adopts a strongly contrarian approach by increasing exposure to stocks when they are cheaper, and by mandate its net equity exposure ranges from 45% to 100%. As such, this fund is less flexible than many of its peers, which could lead to above-average losses in a prolonged bear market.

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