If you are running the European business of a global fund management group, historic fund flows can be a seductive but dangerous metric. In the murky, random world of investments, often the only thing you can be sure of is that markets are not going to do you the service of following familiar patterns.
Who would have guessed 12 months ago that the fifth most popular asset class in terms of European mutual fund flows would be developed markets government bonds? That people would sell out of high yield but load up on credit? That despite its great success, people would be selling out of US equities?
But even though those flows can be deceptive, sometimes the trend is too big to ignore. The biggest groups of strategies in fund flows in the past 12 months has been multi-asset funds. More money has gone into those funds than in all the other funds combined.
So, not surprisingly, when Jamie Hammond, managing director of Franklin Templeton’s European business was asked about his strategic outlook, the talk quickly turned to this highly successful area.
“One of the big things that I can talk about has been the whole growth in interest in multi-asset, outcome oriented products,” he says. By that he is not just talking about absolute return products, but anything that targets either a set rate of return or a fixed level of volatility.
“We have recently seen a desire and a search for regular yield and income in a low-volatility manner,” he says. “And while we have still seen strong flows into unconstrained fixed income funds, a lot of people are now moving from fixed income, where they are not getting the historical yields they had been used to, to flexible, balanced, multi-asset products that can give them the type of yield requirements that they have but without the volatility of equities. “That is a trend I have seen throughout the region but particularly Italy and Germany.” Hammond divides the entire multi-asset world into two: the old-style equity/bond balanced fund, the life cycle fund and so on; and the new, much more flexible product types which can delve into a much wider range of Ucits-enabled options.
“The diversification between diversified growth funds is huge,” he points out. “You might have Schroder Diversified Growth at one end of the spectrum and Standard Life GARS at the other. These are two very different funds with different risk/return profiles and investment universes, but they are both in the cash-plus diversified growth sector.”
That gives a lot of choice to both fund selectors and end investors. But also it becomes very hard to judge how good a fund is relative to its sector because the mandates are so different.
As you would expect, Franklin Templeton has a well-established set of those traditional balanced funds, predominantly switching between equity and bonds. But much of his attention is clearly focused on the newer funds.
In Frankfurt, it has a fund manager called Matthias Hoppe, who has been running a range of risk-graded multi-asset products for some time – the Franklin Strategic Dynamic, Balanced and Conservative funds. Those have now been folded into the main Luxembourg Sicav, so they fall under the companies wider distribution agreements. You can read his comments on dealing with volatility in the article on pages 4-5.
“In Germany and Italy we’ve seen the most success – but that’s probably no coincidence because they are also our two largest countries by asset base as well,” he explains. “But now we have got them in the Sicav, we have seen some interest in Belgium and Spain. “We are at the end of a six or seven year bull market right now and so there are clients searching for alpha. Is there going to be a swing back to active from passive – that is certainly something I am starting to see.”
On top of that, a year ago Franklin Templeton recruited a big name fund manager from Insight. In May 2014, Toby Hayes launched two multi-asset, target return funds with very few limitations on how he expresses his global investment views. The Franklin Diversified Income and Growth funds are UK-domiciled but Hammond hopes to give European investors access to this type of strategy by the end of this year.
“It is a new-style approach,” Hammond explains. “It is what Toby calls ‘risk factor investing’. If he wants to play the dollar against the yen or look at risk premia, it is very much: ‘I have a target return, so where is the best risk-adjusted way to achieve that?’” The underlying investments used to express his global views can be anything from derivatives to exchange traded funds to mutual funds.
Hammond thinks one of the contributingfactors to the success of these new-style funds is Mifid II.
“Mifid includes a requirement for Franklin Templeton as a manufacturer to look through the distributor to the end investor’s needs,” he explains.
The focus going forward will be on the ability to deliver on stated outcomes to clients. On top of that, it is important that not only manufacturers but also distributors can accurately set and manage client expectations. As an industry, we have traditionally struggled with this. “Part of the shift towards these outcome products is that you get to understand the clients’ return requirements, volatility tolerances and the products are designed to deliver those outcomes.”
Another thing Hammond has to think about is target markets. How do you define a target market for these products? “If you take a diversified growth fund, is the target market the newer investor who wants diversification without too much risk?” asks Hammond. “Or is the target marketa retired investor who wants to use the drawdown facility to create a stable income?
“The important thing is to make sure we target suitable investors.” This also explains the explosion in popularity of these products. The multi-asset part gives diversification away from the overloaded and troublesome traditional asset classes; while the outcome-orientation means that investors can actually use them to more directly match their needs. This interest in new-style multiasset products is not new, of course. “There has been a move for the past two or three years towards these products,” he says.
“So it is not as if we are going out there trying to present a new concept but we do have to differentiate ourselves from the competition.” One way he is going to try to do that is by updating and improving the service model.n “We are just rolling out changes right now. We have instigated training for all our sales people on the multi-asset products and the processes behind them. I touched on the Mifid 2 requirements and the need to understand the needs of the end clients.
“On the back of that, we have created the literature and supporting documents to help both fund selectors understand the product and also advisers out in the field. The challenge is to articulate that message in a way that both advisers and investors can understand.”