“From an adviser’s point of view, multi-asset solutions make sense, because they are less risky to recommend than focusing on a specific asset class,” says Dirkx, who is part of the team managing multi-asset portfolios at BHF TRUST, the private wealth management arm of BHF-BANK, which has some €40bn in assets under management. “However, if you want to preserve capital at all times, multi-asset funds are probably the wrong product,” he adds. “You have to realise these funds generally do not offer protection against equity bear markets in the short term.”
Philipp Dirkx has been working at BHF BANK since 2012, first as a fund analyst and since December 2013 as co-manager of its flagship multi-asset fund, the BHF Multi Asset FT Fund.
When attending a fund selector conference in Germany recently, he was shocked to learn that many of his colleagues gravely underestimated the correlation between European equities and balanced mixed asset funds. “Only about 10% estimated correctly, that the correlation was in excess of 0.8 in the short and long term.”
Making strong choices
But this doesn’t mean that multi-asset portfolios are a bad concept. It’s just a question of how you structure it, says Dirkx. BHF’s multi-asset fund consists of low-cost ETFs on the one hand, and highly active funds and single securities on the other. “At the moment, it’s about 40% ETFs, 20% active funds and 20% single stocks and 20% structured products, such as discount certificates,” Dirkx explains. The focus on highly active funds, one third of which are liquid alternatives, enabled him to drive down the correlation to the EURO STOXX 50 to 0.71% over the past three years, and even to 0.6% over the past five years.
“Generally, we invest in ETFs in rather efficient equity markets like the US, where among other things analyst coverage is relatively high and return dispersions between different active managers are not too pronounced. Even if I get a good manager in the US, he will probably still have an alpha of only 1 to 2%,” he says. “In emerging markets, on the other hand, a manager has a better chance to outperform the market, so it’s worth buying an active fund in this space.” In general, we prefer an ETF over an active fund which has a relatively low tracking error and only a moderate active share.
So far, Dirkx has only been investing in ETFs which replicate a market cap-weighted index. “We are not yet invested in smart beta, though we are planning to look into this segment further. Especially when it comes to strategic asset allocation, smart beta could be a good alternative to an active fund,” he says.