Passive, low-cost products are relentlessly increasing their market share, but their not the only funds raking in investors' cash. Investors’ hunt for yield has also buoyed sentiment towards flexible and unconstrained mandates. Funds in the Morningstar Flexible Allocation Global category saw cumulative inflows of over €40 billion in the three years to the end of April 2017.
The growth in assets has been fast and steady: since January 2010, these strategies have enjoyed positive flows in every single month except one, and as recently as March 2017 they recorded the second-best month since Morningstar started tracking flows data, with roughly €2.4 billion of net inflows.
Fund selection in this universe can be a daunting task. Asset management firms seized the opportunity by increasing their offerings in the space: the category currently counts over 1,500 funds in total, with a plethora of young players and a decent amount of churn in recent years.
In the five-year interval from 2012 to the end of 2016, we counted 805 fund launches and 614 terminations, that is, funds either merged or liquidated. As a result, almost one third of the funds in the category don’t have the three-year track record required to have a Morningstar Rating assigned.
Wide Remit - and Range of Outcomes
The category includes funds optimized for euro-based investors that invest globally in a range of asset types. The large leeway accorded to fund managers can result in a wide range of outcomes and some degree of diversity across the constituents, which in turn is a reflection of the contrasting approaches and management styles. Investors look to these funds for their supposed ability to adapt to different market conditions and seek investment opportunities across regions, sectors, and asset classes, which may sound like an attractive proposition in the context of minuscule bond yields and expensive equity valuations.
So far, however, performance hasn’t lived up to investors’ expectations. Morningstar research published in March 2017, A Bias Toward European Stocks Has Hurt Allocation Funds, noted that most of these funds had difficulty beating their Morningstar Category benchmarks, particularly over longer periods of time.
In fact, over a 10-year period the median fund in the Flexible Allocation – Global category trailed its 50-50 bond/equity benchmark by a staggering 4.36% annualised. Interestingly, in general these funds haven’t proved very resilient in terms of downside risk protection either, nor have they produced better risk adjusted results relative to their category index.
We have identified some key funds in the sector; on the basis of performance we have chosen Investec Diversified Growth Fund, on the basis of size, Deutsche Invest I Multi Opportunities stands out, and Kames Global Diversified Income is a notable newcomer.
