In recent years, inflows into multi-asset funds have dwarfed those into bond and equity funds. Over the past two years alone, an eye-watering net €160bn has flowed into long-only multi-asset funds according to Morningstar data.
At the Expert Investor Pan-European Congress in Rome earlier this month, we asked fund selectors why they are such avid fans of these products.
It turns out the single most important motivation for professional investors for picking multi-asset funds is to diversify client portfolios. Outsourcing asset allocation is another reason for resorting to them.
It seems using multi-asset funds is a voluntary decision by fund buyers, and is not driven by client demand: less than one in 10 professional fund selectors use multi-asset funds just because their clients want them to do so.
Since the main aspect of multi-asset funds that attracts investors is their diversifying nature, it’s probably of little surprise that flexible and moderate multi-asset funds are the most popular options. Only about a quarter of investors who use multi-asset funds say their clients’ preference is with cautious or aggressive funds.
To hedge or not to hedge?
Many investors hedge currency risk in their fixed income investments outside the euro area. The merits of this are debatable because of the high interest rate differential that must be paid to hedge exposure to most other currencies because of the ECB’s negative interest rate policy.
The nature of multi-asset funds, which only consist partly of bonds, only further complicates the matter. And investors disagree on how best to approach deal with the hedging dilemma: some 17% of Congress delegates who use multi-asset funds always hedge currency risk in their multi-asset funds, while 26% never do. A similar percentage only hedge currency risk in their defensive, bond-heavy funds.
The biggest group of fund selectors (three in 10), however, leave this decision to their clients. Considering the impact the decision whether or not to hedge foreign currency exposure has on the risk profile of an investment, and the possibly large bearing on returns, that’s probably a wise call.