Research by HSBC Global Asset Management indicates investors focus on four specific areas when considering a multi-asset solution. Meike Bliebenicht, a senior product specialist at the firm, tells Julian Marr how its own Global Strategy range measures up
What exactly do people want from an investment? It is something any provider ought to ask in relation to their range of products and indeed HSBC Global Asset Management felt it was so important a question the firm commissioned two separate pieces of research to help build an understanding of just what people are looking for from multi-asset solutions these days.
As Meike Bliebenicht, a senior product specialist at HSBC Global, points out, multi-asset has come a long way in terms of both sophistication and popularity in the two decades or so since it became a serious option for UK investors. “From an often quite expensive mix of some equities and bonds, multi-asset has evolved into a convenient, low-cost, one-stop investment solution that can be used in many ways,” she says.
|"Compared even with five years ago, there is a much greater understanding among investors that a fund’s OCF can eat into net returns."
“Investors like the diversification they enjoy across different asset classes – spreading risk while benefiting from the opportunities offered. Multi-asset also takes away the challenge of identifying not only the best asset class now but also what will be the best asset class in the future and the best time to switch, which is hardly possible.”
As a result – and after an extra boost from recent changes to the UK’s pension landscape – the last decade has seen net inflows into multi-asset funds up 171%, compared with a 94% rise for equity funds, according to Investment Association statistics. By itself, the Mixed Asset 20-60% Shares sector has been the top-selling fund grouping in the UK in three of the last five calendar years.
A good time then to be taking stock and HSBC Global’s twin pieces of research duly served up some interesting food for thought. Key points arising from the research the firm undertook with Citywire may be seen in the accompanying box while the second piece, conducted in association with consultant The Wisdom Council, identified four principal areas people focus upon when deciding on a multi-asset solution.
“The first is investment process, which should be transparent, thorough and repeatable so people can understand what the fund is doing,” says Bliebenicht. “My own interpretation is this stems from the financial crisis, when people often bought into something they did not really understand. Now, however, they want to see exactly what will happen to their money before they make an investment.
“Track record is also important – and not just of the product, but of the team and firm behind it too – as is accessibility. Last but not least is price, which is an area where the focus has increased hugely over the last few years.”
How then does HSBC’s own multi-asset Global Strategy fund range, which comprises ‘Cautious’, ‘Balanced’ and ‘Dynamic’ portfolios, measure up? “An investment process has to be thorough and it has to understandable,” says Bliebenicht. “Obviously a multi-asset fund offers the opportunity to pick any asset class you like but, to achieve a robust asset allocation, you need to ensure the asset classes you are adding into your portfolio are robust as well.
“So there have to be some checking points – for example, is the asset class liquid? Our funds trade on a daily basis, which means the asset classes we invest in have to trade on a daily basis as well. That is why you are not going to see things like private equity or infrastructure in our portfolios’ strategic asset allocations – we simply cannot get in and out of them as quickly as we would like.”
Another consideration would be correlations between the assets the portfolios do own. “Correlations do change – for example, the correlation between equities and global high yield – so obviously you have to consider those changes in the context of your portfolio construction,” says Bliebenicht. “You cannot just sit back and watch markets and parameters change and not adjust your asset allocation.”
Robust asset allocation
She is equally forthright on data input, saying: “Multi-asset managers have to ensure they provide a robust asset allocation – in the low-cost space also. Asset allocation is what drives the returns – what drives the risk ultimately – and it is not good enough just to use historic data to construct an asset allocation that is supposed to be future-proof.”
This is the thinking that leads the team behind the Global Strategy range to construct expected returns for the asset classes they want to hold. “Take gilts,” says Bliebenicht. “If I downloaded their five-year returns, they would be fantastic, but if I then created a portfolio that basically assumed returns were going to continue like that in the future, my asset allocation would be very risky. You have to look at where we are now and then ask, what is the realistic return we can assume for each asset class?”
The next stage in the team’s investment process is to consider and review the portfolio risk budgets and constraints. “Some clients might be cautious while others are a bit more adventurous, so you need to consider the risk budget in your portfolio construction,” says Bliebenicht. “We have enhanced the mean variance optimisation process with various statistical techniques to make our asset allocation even more robust.
“I know I have used that word a few times but obviously we would like to be able to deliver to our investors’ expectations. Only a thorough construction process and regular reviews of asset allocation and positioning can ensure that a portfolio does not drift away from its long-term risk profile over time. Then, after we have set up our long-term asset allocation, we look at factors, such as the macroeconomic environment, which can have shorter-term return impacts.
“If you look at the current macroeconomic backdrop, GDP growth expectations for the UK and the US are relatively decent – we expect roughly 2.5% for both countries in 2016 – while unemployment rates have come down substantially and our central scenario for next year is not deflation but low inflation of around 1.5%. Yes, we do expect interest rates to rise – but gradually – so it is not a bad backdrop for equity investors overall. On a valuation basis, however, equities are no longer as attractive as they were – in fact, they are quite expensive.
“If you then look at the increased geopolitical risks we are currently facing and combine that with deteriorating fundamentals in emerging markets, such as Brazil, then there are big risks out there. That is why, at the tactical asset allocation level, we currently have a neutral allocation to equities, relative to the strategic asset class target.”
Of course, building strategic asset allocation models and factoring in tactical adjustments means little if the investment ideas are not executed well. “We believe the best way to capture asset allocation is typically through passive instruments,” says Bliebenicht.
“Most of the vehicles we hold in our Global Strategy fund range are HSBC-managed for the simple reason we can access them at a zero annual management fee, which helps keep the OCF [ongoing charges figure] at absolute minimum levels. In the relatively unlikely event a competitor has an even cheaper product, we will use that. We want to implement our dynamic asset allocation process in the most cost-efficient way.”
|HSBC Global Strategy Range – risk-adjusted returns since inception
|Source: HSBC Global Asset Management
Turning to track record, Bliebenicht points out its 2011 launch date means the Global Strategy range has already experienced an array of different market conditions. The chart on the right plots the annualised returns and volatility of the three portfolios alongside the respective showings of equity and gilt benchmarks.
“You do see the efficient frontier building nicely, with the highest-risk portfolio posting the highest return,” comments Bliebenicht. “Furthermore, while the Cautious portfolio and the gilt index have generated the same level of performance, the diversification benefits of the Cautious portfolio mean it has achieved its return at 50% of the risk. Obviously, from a risk-adjusted point of view, this makes it the superior portfolio of the two and, across the three portfolios, it is exactly what you would expect from a multi-asset range.”
As for the track record of those behind the fund range, the portfolios are overseen by Caroline Hitch, who has headed up HSBC Global’s Wealth Portfolio Management team for the last 10 years. She is supported by senior wealth portfolio manager Jane Davies and, more broadly, by HSBC’s global resources, which include 70-plus multi-asset investment professionals and the firm’s Macro Economic Research, Asset Allocation Strategy and Portfolio Analytics and Design teams.
“Accessibility was the next item on the wish list,” Bliebenicht continues. “Obviously, investment process and track record mean little if investors cannot access the funds so our range can be found on the major UK platforms. Then there is price, which is so important these days. Compared even with five years ago, there is a much greater understanding among investors that a fund’s OCF can eat into net returns.
“Our own research has revealed a huge range of ‘clean’ OCFs across popular multi-asset fund ranges in the UK – from 24 to 87 basis points. This in part reflects different approaches to multi-asset investing but our own approach means we are able to come in as the cheapest of the low-cost multi-asset investing household names, at 17 basis points.
“Even so, we do also offer a variety of support for the fund range, including monthly and quarterly reports and other literature as well as videos and some training, which should further help meet the expectations of investors and advisers.”
Why do advisers use multi-asset funds?
Given the number of multi-asset income funds launched in recent years, perhaps one of the more surprising findings from the research HSBC Global Asset Management conducted in association with Citywire earlier this year is that just 8% of advisers interviewed saw income as a key reason to invest in multi-asset solutions.
In contrast, 74% of advisers interviewed said they looked at multi-asset funds for their ability to offer lower fees; 88% said multi-asset solutions allowed them to simplify the financial advice process for their clients; and 92% saw the ability to match a portfolio to client risk profiles as an important feature.
“Once an adviser has identified a client’s risk attitude as cautious, for example, they want to be sure the fund they buy will remain a cautious fund over time,” says HSBC Global’s Meike Bliebenicht. “What they do not want is a multi-asset fund that suddenly drifts away from its cautious risk profile because some parameters in the market have changed and the portfolio’s allocations have not been adjusted. This is why even in the low-cost multi asset space we are offering an active asset allocation product range, at an extremely competitive OCF.”