Multi-asset funds with strict mandates outperformed their flexible peers during 2012, says S&P Capital IQ Fund Research in its latest asset allocation sector trends paper.
In 2012, fully flexible asset allocation funds might have been expected to perform better in an environment where controlling risk exposure in the first half and taking more risk in the last six months was key to improving performance.
In fact, the fully flexible asset allocation funds generally underperformed in comparison to multi-asset funds whose asset allocation is constrained by their mandate.
Funds within the global neutral in euro peer group, for example, returned 8.9 per cent in 2012 while those in the flexible peer group returned just 6.7 per cent. Meanwhile, funds in the global neutral US dollar peer group returned 8.7 per cent compared to an 8.4 per cent return by the global flexible US dollar funds. This trend is also reflected over a three- to five-year period in these peer groups with funds in the global neutral euro peer group returning 3.7 per cent and 0.5 per cent (on an annualized basis), respectively, compared to the 1.7 per cent and -0.7 per cent returned by the global flexible US dollar peer group.
The consistent underperformance of flexible multi-asset funds – defined as funds that can invest their portfolios anywhere from zero to 100 per cent in risk assets – may be due to the influence of political news reducing the reliability of both fundamental and technical asset allocation tools. Furthermore, many flexible and defensive funds held gold as a protection against inflation risk, which served to drag further on performance.
Within S&P Capital IQ’s sterling-denominated peer groups, medium-risk multi-asset funds (balanced and neutral peer groups) generally outperformed defensive and aggressive funds last year. Asset allocation balanced was the best-performing peer group in 2012, returning 11 per cent, compared to 10.9 per cent for the sterling aggressive peer group and 7.5 per cent for the sterling defensive peer group. Over three year and five years, the sterling neutral peer group outperformed all the other sterling peer groups, returning 5.8 per cent and 3.5 per cent respectively, on an annualized basis.
In general, the medium-risk peer groups tend to have a lot of exposure to fixed income credit, while defensive funds have more government bonds and cash, and aggressive funds have more equities. This is particularly true of distribution funds that are generally located in the asset allocation neutral sterling peer group.
