Feature | Multi asset
But getting a discount for buying into a dis- parate group of assets? Think again – or rather don’t waste your time trying to figure it out. Recently, multi-asset funds have come under the watch of the regulator for their charges. Far from offering a discount, the fee structure of some of these myriad mul- ti-asset funds are murky and could be cost- ing investors more than the sum of their parts.
Or they might not be. TANGLED WEB
The problem arises in the vehicle’s struc- ture as it is often too difficult to tell what they are paying for at all. In 2017, the Financial Conduct Authority (FCA) noted in its interim report on the asset management industry that although these funds are active in terms of strategy construction, some elements within them may be delivered by passive components. Furthermore, these funds are not compelled to display through which third-party vehi- cle they may be accessing cer- tain markets, meaning there could be discrepancies in what is being paid to use them. Equally, there might not be. The regulator took the view that with such opacity around the fees being charged on all invest- ment funds, the end consumer was unlikely to be able to make an informed choice on which would be the best option for them. Multi-asset, acting as a micro- cosm of the whole investment universe, fell squarely under its view as a key area to sort out.
The FCA set up a working group, chaired by transparency campaigner Chris Sier, who not only produced a paper with recom- mendations for the whole industry, but launched a not-for-profit group that would allow investors to demand clarity on what they were paying their multi-asset managers. One of the working group’s key concerns
36 | portfolio institutional | March 2019 | issue 82
was the lack of transparency on the under- lying funds that could be used by multi-as- set fund managers. Different terminology, measurement meth- ods between companies and non-standard- ised reporting has only added to the mix of murkiness.
RECIPE FOR CONFUSION Rajesh Yadav, senior manager research analyst in multi-asset at Morningstar, out- lined how this part of the investment industry has ended up in such a muddle on how it creates its vehicles. “Passive multi-asset funds using solely tracker funds have changed the landscape over the past couple of years,” he says. “Investors can buy a diversified exposure today for south of 30 basis points.” Most notable players in the UK are Van- guard and Legal & General Investment Management, which both use their in-house ETFs.
These areas typically include emerging market equities and bonds, mid-to-small caps and niche sectors – such as specialist technology – non-agency mortgage and asset-backed securities, CoCos and catas- trophe bonds amongst others. “To add non-directionality to the portfolios some managers will use of uncorrelated alternative strategies such as long/short, absolute return, risk premia and infrastruc- ture where passive solutions are difficult and costly to implement,” Yadav says. When looking at the huge range of asset classes – and take in to account the differ- ent funds, trusts and other vehicles to access them – it is clear to see that setting out all the underlying fees poses something of a challenge.
If you have a manager
who says they are unable or unwilling to ask their under- lying funds for data, you should think long and hard about whether or not you want to carry on working with them. Chris Sier, Clearglass
This has put pressure on managers to cre- ate something competitive, of value – and for a relatively cheap fee. “The first way is to employ a hybrid (barbell) approach where they use passive funds in hard-to-outper- form asset classes, such as US, European and UK equities and developed market bonds, including investment grade,” Yadav says. “They then complement this core with select active managers in niche and less efficient areas of the market.”
Another way asset managers can access a wide range of sectors, while keeping fees low and in-house, has been to create their own internal funds-of-funds, Yadav says, however, he wonders whether many have the “sufficient breadth and the quality of products/teams to build a diversified solution”. “The jury is still out there on this,” he adds. “We see some structural limitations to these types of solutions, and would not be surprised if in due course they open up to at least start using low-cost trackers to gain exposure to certain asset classes where they don’t have internal capabilities.”
This opens the door to more third parties to keep track of. The final way is to offer differ- entiated products to the market, offering products that are unlike traditional asset allocation solutions in the market. To do this, according to Yadav, some have made significant use of non-traditional and esoteric asset classes, such as private equity, risk parity or premia funds, infrastructure, listed and unlisted real estate and absolute return-type strategies, with an aim reduce directionality of the portfolios. While these sectors are known for often producing good returns, they are not the
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