Multi Asset funds are hybrid funds that must invest in three or more asset classes. Funds in this category also have to maintain a minimum 10% allocation to each of these categories. Different asset classes react differently to business cycles, changes in economy & geo-political realities and hence have different levels of risk. Allocating funds solely to a single asset class is not prudent as it is prone to behave inconsistently and may not deliver efficient risk adjusted returns.
Asset allocation tries to balance the risk by dividing assets among investment vehicles. Low correlation among different asset classes provide the portfolio with an effective hedge, lowering the volatility of the portfolio.
The Category: This category typically has funds with varied combinations of equity, debt/fixed income and one more asset classes ranging from gold, commodities, international equities etc.
Why has this category failed in the past?
Chasing the best performing asset class: How often have you seen a batsman go for a proverbial ‘winning shot’ when it is not needed to win the match? Do ‘unforced errors’ like these cost dear? Applying this analogy to the multi asset category is akin to chasing the best performing asset class.
One needs to understand the interplay of the properties of asset classes and how they react when they are forced together into a multi asset combination. It can’t be performed by having a view on individual asset classes.
Asset allocation should be done under a framework but not in response to views on a speci?c asset class – when the view goes wrong or risks materialize unexpectedly, the chemistry fails.
Quest for Equity Taxation: Chasing equity taxation, hinders performance as in a quest for avoiding taxes, one avoids allocation to the right asset classes. Taxes are a happy outcomes and managers should aim at optimising taxes and not avoiding them.
Competing with other aggressive categories: In trying to compete with other categories multi asset funds have become more like balanced funds with some gold. The purpose of multi asset funds in an investor’s portfolio is to provide fixed income like returns with lower volatility. Their aim is not beat the highest performing equity fund or index fund. And lastly,
Cutting marginal asset classes in bull-markets: Allocations to gold or international equities should be used as cushions against sharp fluctuations of aggressive asset classes. They should be used to reduce volatility and not to get higher returns.
Conclusion: Asset allocation works when it is done dispassionately without have a strong view on any individual asset class. The mix can also get colluded when the money manager tries to chase returns or a preferable taxation. Most funds in this category – have pursued the quest for higher returns making the fund riskier or become quasi equity fund in the quest of equity taxation – and lost the way.
The objective of being a true multi asset fund is achieved when the goals of the investor and the investment manager are completely aligned and the fund is managed in a ‘true to label’ fashion – both in letter and spirit.
To avoid the pitfalls of the past, funds in this category should try to follow a disciplined, rule based asset allocation.
Umang Thaker
Head of Products, Motilal Oswal AMC
This Article was originally published in ET Online, on 14thOctober,2020.
