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Multi-asset fried by damning research

You are more likely to be “hit by lightning” than see returns that beat inflation and cash from a multi-asset fund, according to fresh research raising the debate into cost effectiveness once again.

The debate over what exactly the average 1.1% multi-asset fund fee gets investors has reared its head following the research published by research firm Finalytiq in its 2017 multi-asset fund guide, ‘The Gravy Train’.

The vast majority of multi-asset fund managers perform worse than a simple market portfolio, Finalytiq argues, and charge clients “very high fees for the privilege”.

One-quarter of multi-asset fund ranges charge an OCF north of 1.4%, it found.

It is damning research and could force active multi-asset funds to take a long hard look in the mirror.

Worst odds

Abraham Okusanya, Finalytiq founder, slammed multi-asset managers following the research, noting they were still a vital one-stop shop used by advisers.

“The sad reality is that the odds of real return for a typical investor in these funds, in excess of inflation and cash, are worse than the odds of being struck by lightning,” he says.

“Accordingly, advisers have an obligation to ensure that funds recommended for their clients are in sync with their needs and represent value for money.”

The findings were based on a comparison of 69 multi-asset funds against what the researchers dubbed a ‘no brainer portfolio’ of passive products split between equities and bonds charging 0.5% a year.

Of the 58 fund families that had five-year performance data, 56 underperformed the market portfolio benchmark net of fees, the research found.

Some observers have, quite rightly, pointed out that passive products have performed well in times of ever-rising markets and suggested it may not be a fair comparison over three or five years.

Be clear

Gavin Haynes, managing director at Whitechurch Securities, argues a passive portfolio is “bound to look good” after years of rising bond prices and stockmarkets.

He reverts back to the value-add argument in support of the sector, saying: “In a more challenging environment multi-asset managers who can add value through shrewd stock pickers and a more diversified asset allocation than beta strategies will earn their fees.”

However, Finalytiq’s work reflected similar results over a far longer time frame of 10 years, where 23 of the 25 multi-asset fund ranges with 10-year performance data underperformed.

Ben Yearsley, director of Shore Financial Planning, says there is a problem with performance and the risk of over-diversification, but that ultimately investors should know what they are getting into.

“You need to be clear on why you are buying a multi-asset fund,” he says.

“You need to be aware of what you are buying and why you are buying it. It’s not about top line performance, it’s about how that performance is delivered.”

He adds the onus is on the investor, not the multi-asset manager, to “make sure you know what your fund is doing and ask, is it doing what you expected it to do?”

The research plays into a far larger and longer term theme over fund fees and will likely play into the hands of those critical of active management.

Even Haynes admits the pressure to cut costs will ramp up.

“The more expensive propositions in the multi-asset fund space will come under increasing pressure to be more cost competitive,” he says, and at the very least will need prove themselves in the next downturn when they have been claiming their time to shine has come.

When falling markets make stockpicking all the more important is when active managers will need to step up if they are to bat off this kind of research.

Part of the Mark Allen Group.