Another reason for multi-asset funds’ popularity is the recent increased interest in so-called outcome-oriented funds. As opposed to their benchmarked counterparts, outcome-oriented funds – often referred to as growth, flexible or total return funds – are not tied to a benchmark and rather aim to achieve a “cash plus” or an “inflation plus” return with a certain long-term target level of risk. In the short term, their overall risk budget is often flexible, allowing the fund to take on more risk if market opportunities arise and to stay conservatively positioned to mitigate losses if risks surface. This also implies that outcome-oriented multi-asset funds are often less restrictive than traditional benchmarked mixed funds in terms of asset allocation, allowing their portfolio managers to take larger positions in their preferred asset classes. Mutual funds whose investment managers are able to make good use of this flexible fund design by accurately assessing the relative attractiveness of asset classes are clearly a strong value proposition for a broad base of clients.
Also, an increasingly prominent feature of many outcome-oriented multi-asset funds is their ability to manage their duration position more flexibly. By doing so, these funds can limit, eliminate or even benefit from potential interest rate increases, addressing a major concern of many clients.
A last point why multi-asset funds are gaining traction relates to the more risk-aware nature of clients. By allowing for more flexibility, well-managed flexible multi-asset strategies can provide attractive returns while running a risk level comparable to that of a diversified bond fund. Thus, many would-be fixed income investors are ever more turning to these investment strategies to satisfy their desire for safe returns at their desired level of overall risk. At the same time, potential equity investors can benefit from lower ex-ante risk of these funds, while still being able to participate to a big extent in an equity rally.
With respect to risk, it is important to mention another impact of the global financial crisis which influences the way multi-asset managers must approach asset allocation in today’s environment. Markets now appear to be gripped by even more herd-like behavior and more frequent disruptions. Emotions can have such an impact that markets can fail to function rationally much more often. Economic cycles have become shorter. Therefore, investors need to be quick to respond to opportunities and risks that arise in a market. Due to the greater sensitivity of the real economy to markets, opportunities can quickly disappear and risks can quickly increase. While in the long term, markets are driven by fundamental factors, investor behaviour can influence their direction significantly. Multi-asset managers who are able to correctly measure, interpret and translate their assessment of behavioral factors at play in a particular market might offer a big advantage in this environment.
