Routine way of blending multi asset funds keeps biases impacting returns

Posted on Posted in Articles
Routine way of blending multi asset funds keeps biases impacting returns

Intermediaries are facing “unintended consequences” by blending multi asset funds together using only a past performance-based approach, according to Scopic Research.

Managing director Paul Ilott pointed to how combining multi asset funds that have passed through a simple performance filter has, in recent years, often led to blending multi asset funds where "returns are still driven by the same embedded biases".

Ilott said these most commonly include growth style and quality style factors, larger companies - particularly in the US, and ESG-risk characteristics.

"Combining multi asset funds that share the same embedded biases (DNA) - irrespective of whether they invest directly in securities, in passives, in actively managed single strategy funds, or even in a combination of all of these, means that their returns are highly likely to be affected by the same performance headwinds and tailwinds," Ilott added.

"This can lead to investment diversification by fund name only, with the real possibility that the funds selected for blending will at some stage all perform poorly at the same time."

The research agency is set to update its multi asset DNA reports service in anto attempt to improve the issue and the subsequent impact on returns.

The tool has been designed for intermediaries to visualise the combined DNA from up to four multi asset funds into one larger portfolio.

Ilott said: "Our qualitative based portfolio blending tool will help intermediaries to avoid some of the many unintended consequences that we see when multi asset funds are blended together using only a past performance-based approach."

Source: PA