Multi-Asset-Supplement-Sept-2015

CITYWIREGLOBAL.COM SEPTEMBER 2015

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MULTI-ASSET < CONTENTS & LEADER

LANDING A PERFECT COMBINATION

CHRIS SLOLEYDeputy EditorCitywire Global

Mixed asset funds sit in a unique spot in terms

of asset allocation, with investors able to tap the

best opportunities from across equities, bonds and

alternatives depending on the prevailing market mood.

Much like in fishing, casting a wide net can increase

potential returns but also brings with it the possibility

of drawing in unwanted catches from unpopular or

underperforming areas of the market.

This supplement takes a closer look at how fund

managers can defend against unwittingly adding risk

and also how they can add both performance and

protection by making timely moves into different

investments.

To gain a greater understanding of how mixed asset

funds fit into allocation strategies, we canvassed

leading fund selectors and investment professionals

to uncover the best ways to make the most of a mixed

asset approach.

In addition, we also shine a light on the stand-out

performers over three and five years in risk-adjusted

terms. These leading lights reveal how to find the right

blend of investment ideas in order to produce positive

returns regardless of what the macro environment has

to throw at them.

The fund selectorsFund pickers give us their take on the multi-asset market and name their favoured strategies

The fund managersLeading investors reveal how they have balanced risk and reward

The view aheadTop fund managers discuss tactics for the increasingly uncertain outlook

4 11 21

CITYWIRE GLOBAL | SEPTEMBER 20154

MULTI-ASSET > THE FUND SELECTORS

HOW ARE FUND ANALYSTS USING MULTI-ASSET STRATEGIES?Fund pickers give us their outlook on the mixed asset market and name the funds they are using or watching

Since the financial crisis, the majority of our clients have remained risk averse. Today, they pay

particular attention to product transparency and are interested in characteristics offered by multi-

asset funds such as diversification, low volatility, capital preservation and limited downside risk.

However, current geopolitical events have increased volatility as well as the correlation between

asset classes, which makes building a diversified portfolio far more complex.

For example, during the correction initiated by the Grexit risk in May and June, we saw that

bonds did not live up to their role as a safe asset and even recorded negative performances. So,

diversification in traditional asset classes is becoming increasingly difficult and investors need to

pay more attention to relative valuation and liquidity tailwinds.

Experience shows how difficult it is to predict the impact of a negative shock in the markets.

Having a degree of anticipation does help to uncover outstanding multi-asset funds.

One of the main challenges these strategies face today, is taking account of liquidity risks in

some asset classes.

Recently, we have seen periods of volatility in which liquidity has evaporated in a matter of

minutes creating a ‘flash crash’ in fixed-income, forex and equities markets. The decline in market

liquidity is especially worrying in fixed income assets traded over the counter.

Even though the Fed is preparing everyone for a change in its monetary policy regime, it will

take time before investors adapt to this new era.

We have all been living in an environment of financial repression, low interest rates and low

volatility for years now. The last time the Fed started to raise interest rates was in 2004; we

are talking about an event that many fund managers out there have not experienced in their

professional life and that’s a real challenge for fund selectors.

We are adapting our fund selection approach to this new market environment and favouring

those multi-asset fund managers with previous experience of monetary normalisation who can

manage liquidity risk during stressful periods.

We have selected several multi-asset funds which have been very successful over the last few

years including the M&G Dynamic Allocation, Carmignac Patrimoine, Echiquier ARTY and CPR

Croissance Réactive funds.

S I L V I A B O C C H I O T T IL C L

P A R I S


THE FUND SELECTORS < MULTI-ASSET

Y U R I K R A S S I NU F S C A P I T A L P A R T N E R S

M O S C O W

Multi-asset funds are a very convenient way to gain diversified

exposure to a broad range of securities. However, we are a little

critical towards the conventional perceptions held by many asset

allocators regarding current global economic affairs.

Most portfolios are constructed under the implicit premise that

we are acting within a relatively stable monetary system. The

great majority of all currently active investment professionals have

been exclusively active in a time period often referred to as ‘great

moderation’.

This historically extraordinary time period offered mainly falling

interest rates and disinflation and a financial paradigm based

on a ‘riskless rate’. Market participants are currently completely

abandoning the possibility that a major industrialised state could

default, despite permanently rising global debt levels.

In our view, we are entering an environment of increasingly

unstable global financial architecture. The current fiat-money

system has led to huge distortions of capital allocation and enabled

governments to engage in reckless spending sprees.

The artificial price fixing of interest rates has led to mal-

M A R K V A L E KI N C R E M E N T U M

V A D U Z

investments on a grand scale and among others to a gigantic debt

bubble. Going forward we will witness – and in fact we have already

begun witnessing – more extreme waves of deflation and inflation

than during the past 30 years.

Our views are heavily influenced by the Austrian School of

Economics as well as by Complexity Theory. Both disciplines are

seldom taught at mainstream universities today.

Consequently, we are now launching our own multi-asset

strategy combining assets in a way that anticipates more extreme

scenarios. This strategy will include strategic allocations in equities,

commodities, managed futures and even some fixed income.

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Multi-asset strategies, as well as balanced funds which are

executing such an approach, are mostly attractive for those

investors who are going for a good balance between risk and

return.

This can be reached through several specific features

inherent in different classes of assets, such as sensitivity to

short, medium, and long-term economic factors, cycles of

ups and downs, and correlations between a given sector and

the broad market.

The most important thing about multi-asset strategies is

rather simple: they should provide investors with a high level

of capital protection with some modest return. The latter

should generally be equal or higher than the average rate of

growth in the world’s economy.

We all know that bubbles in some markets are

accompanied with drawdowns in others, both regionally and

between different asset classes, so, generally, investors have

two options: they can try to predict the ups and downs of

respective markets, which involves being able to withdraw

capital from one market or asset class and invest it in

another; or diversify investments between different markets

and asset classes.

The first strategy is a speculative one with a host of

pros and cons. The second, based on a statistically valid

and carefully selected set of asset classes, is much more

conservative and protective.

Our clients, especially those looking for a good risk-return

balance, like multi-asset funds, especially denominated in

currencies other than the US dollar or euro. We see a lot of

interest in both the Swiss franc and British pound at present.

At the same time we have always been sceptical of multi-

asset funds with strategies which target investments in

emerging markets.

For high-net-worth clients we can construct a tailored

portfolio of assets, which could include direct investments in

real estate or physical gold. Usually we advise our clients to

use several European multi-asset funds as long as they have

a good track record.



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G I A N P I E R O S T U R Z OL O B N E K W E A LT H P A R T N E R S

G E N E V A G E N E V A

Historically, we have not had exposure to mixed-asset funds

because we find these difficult to fit into our investment philosophy.

Essentially, we are the ones making the discretionary calls and so feel

we are better placed than an external or third-party manager to be

allocating to various asset classes.

In my job, which covers both fund selection and also sitting on the

investment committee at the bank, we really try to take all the major

investment decisions, be they on region, asset class or fund managers.

For example, in fixed income, we prefer direct manager selection or

direct investment because of the transparency.

We can get clear visibility on the investment and make sure that

the duration and maturities being invested in are in keeping with

our overall investment philosophy. That is a problem with multi-

asset managers, as it becomes less clear and there could be a lot of

change going on within the fund’s internal allocations which is not

communicated to investors.

If we have to use mixed asset-type products it will be more in the

liquid alternatives market, where we have done a lot of work in multi-

strategy or funds of hedge funds. However, here, as with the long-only

offerings, we have a preference for those strategies where we can

directly see the investment, long/short equity is particularly popular.

Doing the job ourselves also allows us to focus on risk and

volatility. We are able to calibrate the mixture of assets, or managers,

to meet our own volatility requirements rather than being dependent

on a third party.

In terms of our overall allocations at present, we are more

focused on fixed income because that is likely to be volatile with the

movements of the Federal Reserve. We believe this will lead to a

significant impact on rates and we want to maintain a duration which

will be able to best deal with these headwinds.

Multi-asset funds definitely have a role within our asset allocation but

we cap this at 15% of the overall exposure. We like to include these

funds because we can locate those managers able to operate flexible

approaches, which reflects the same view we have in fixed income,

where we prefer unconstrained strategies.

We want managers who are able to respond to wider market

events in an appropriate way. We assess this very closely by looking at

how they have performed historically and how they have responded

to events in the past, both in terms of asset allocation or volatility

management.

We also favour managers who adopt some quant screening in their

process, but we like this to be combined with a discretionary overlay.

There are a lot of funds we like including the Carmignac Patrimoine

fund. We also favour the Invesco Balanced Risk Allocation fund, as

well as the M&G Dynamic Allocation fund and the Nordea Stable

Return and Oddo Optimal funds.

Closer to home we prefer the PBS Smart fund, which is run by some

of our counterparts here in Geneva at the Banque Pâris Bertrand

Sturdza. We essentially want managers that are very active and able

to allocate accordingly when the market changes.

These funds are also usually very benchmark agnostic, which is a

positive.


THE FUND SELECTORS < MULTI-ASSET

V A L E N T I N A M A D A M AS Y M P H O N I A

T U R I N

We are currently using multi-asset funds because in our range of

multi-manager managed accounts we run two portfolios dedicated

to flexible strategies.

The first and most important managed account is invested in

strategies which usually have a significant participation in equity

markets. However, they also need to have the flexibility to reduce risk

and protect the portfolio in downside markets by investing in bonds,

cash or derivatives.

The risk/reward profile of these kinds of funds, with a range of

volatility between 6-10% is very interesting, because it allows fairly

risk-averse clients to participate in equity markets with a more

prudent approach and some downside protection.

We combine multi-asset funds with other strategies with a similar

risk profile, such as equity long/short and global macro to enhance

diversification. Examples of multi-asset funds we have as core

positions in our flexible portfolio include the MFS Prudent Wealth

fund run by Barnaby Wiener.

This is an absolute return fund with a value, bottom-up

investment process in its equity component and a flexible allocation

based on the relative valuation of equities, bonds and cash.

The aim of the fund is to outperform the global equity market

in the long run, but with the flexibility to reduce exposure if equity

valuation appears stretched.

The approach is very disciplined and patient. The portfolio

manager takes a very long-term view and prefers being

underinvested when he can’t find the right opportunities.

We are also monitoring new products, such as the Flossbach Von

Storch – Multiple Opportunities II fund. We are currently invested in

the company’s Global Opportunities fund, which has a more equity-

like profile and we also like Acatis Ganè.

The other portfolio in which we use mixed-asset funds is a total

return managed account comprised of different kinds of total return

strategies. The multi-asset funds we are using here usually have

lower volatility and a lower equity weighting.

For example, we like the Echiquier ARTY fund, which has a

flexible allocation between European equity and credit. We also

favour the Ruffer Total Return International fund, as an asset

allocation strategy which combines ‘greed’ with ‘fear’ assets. The

fund aims to preserve capital, while generating a positive return on

a 12-month horizon.

Using multi-asset investments we can better diversify risk

factors into our portfolios, because every portfolio manager

we select has a very broad mandate and his view, strategy and

allocation can be very different from his peers. Moreover, in this

market climate, where it’s difficult to find value in equity and bond

markets, finding managers with the ability to be really flexible is

becoming increasingly important.



Mixed-asset investors have

been trawling a wide range of

opportunities to balance risk and

reward. Rob Griffin reveals where

the top fund managers have lost

and gained

For Marcus Stahlhacke, manager of the Allianz Dynamic Multi Asset

Strategy fund, the decision to take an overweight position in global

equities and European bonds between the spring and autumn of last year

proved to be a masterstroke.

‘They were our most important performance drivers as both asset

classes did very well,’ he says. ‘We had a positive assessment of both

markets based on our analysis, so we simultaneously implemented

overweight positions of up to 125%.’

After initial gains, he moved to decrease risk, particularly on the bond

side in terms of both exposure and duration, while equities were reduced

to benchmark levels.

Listed private equity continued its long outperformance, which

benefited Stahlhacke’s fund, as did the strong showing from inflation-

linked bonds, which did well on the back of the ECB announcing its QE

programme and a changing outlook for inflation.

More disappointing was the performance of REITs, which is another

tool in the arsenal of multi-asset investment. ‘Low interest rates, the

global liquidity wave and the ongoing hunt for yield should have supported

REITs,’ says Stahlhacke. ‘Moreover, the fundamental conditions and

HUNTING GROUNDSHUNTING GROUNDS


THE FUND MANAGERS < MULTI-ASSET

economic phase were positive for the real estate

markets in most of the developed world.’

Unfortunately, this didn’t prove to be

the case. ‘REITs are highly leveraged, so an

increasing bond yield should have a negative

effect,’ he says. ‘The discussions about the rate

hike in the US were a headwind for the global

REIT market. Hence, after our position initially

returned 5%, we saw a decline in value during

spring and summer.’

As far as current positioning is concerned,

Stahlhacke’s asset allocation is currently

skewed towards risky assets, with a move back

towards an overweight in equities and other

opportunistic investments. ‘Bonds are below

their benchmark levels with a significantly

reduced duration of almost two years,’ he says.

‘We continue to hold listed private equity and

inflation-linked bonds both for diversification

benefits and return enhancement.’

THREE-PRONGED SUCCESSCitywire AA-rated Paul Read, co-head of fixed

income, and one of the managers of the Invesco

Pan European High Income fund, credits a

number of areas for helping drive strong returns

over the last five years.

‘Three of the key drivers of the fund’s

performance have been exposure to

subordinated bank debt, high yield and

equities,’ says Read, who is ranked first and

third over three and five years respectively in

the Mixed Assets – Conservative sector, see

tables page 18. ‘In late 2011, subordinated bank

debt represented a particularly compelling

opportunity.’

At that time there were significant regulatory

changes being agreed that the Invesco team

felt would increase the creditworthiness of

banks. ‘Banks were themselves also taking big

steps to repair their balance sheets by raising

capital and increasing liquidity,’ says Read.

‘Through 2012 the market started to price in

this more supportive backdrop with bank bonds

rallying strongly, which benefited our exposure

to the sector.’

The period of market stress during 2011,

that arose from concerns in the eurozone and

led to widening spreads, was used to increase

the fund’s allocation to high yield. Exposure to

high yield rated bonds, including subordinated

financials, was raised to around 55%.

‘This meant we were well placed to capture

the strong period of spread contraction through

2012,’ says Read. ‘As value became realised

CITYWIRE MANAGER RATIO: This reflects how much ‘added value’ in terms of outperformance against the benchmark the fund

manager delivers for each unit of risk assumed, where risk is defined as not mirroring the index’s return. It ties together the fund

manager’s personal career history with the Information Ratio of the underlying funds

in the sector, we took profits raising liquidity

and also increasing exposure to equities, as

prospects for this asset class improved. This

equity exposure then drove returns through

2013.’

Over the past few years, Read and the

team have taken the view that bond markets

are offering declining value, with interest

rate risk in particular providing a poor level of

compensation for the risk. As a result, they

have maintained a duration position in the fund

that at times has been significantly below that

of the broader market.

‘Government bond yields have, however,

continued to fall during this time, meaning

our duration position has acted as a drag on

performance,’ he says. ‘While this is clearly

disappointing we think it is right to continue

to base positioning on the balance of risk and

reward rather than chase returns.’

The benefits of this approach are well

illustrated by the performance of the bund

market year-to-date. From January through to

mid-April the bund seemed to be trading one

way with the 10-year class almost reaching 0%

by mid-April, and Read concedes that during

this period the low duration stance constrained

performance.

‘However, between mid-April and early June

the 10-year bund yield increased to nearly 1%,

which in capital terms would have represented

more than a 9% loss with virtually no income to

compensate,’ he says.

Current positioning in the fund is defensive,

which reflects the team’s view that there is only

limited value in bond markets. Even so, there

are still some pockets of value that they are

seeking to exploit.

‘We now have around a 25% allocation to

high yield within which we are biased toward

higher quality bonds that we consider unlikely

to default,’ he says. ‘The majority of these

bonds are rated BB and B.’

Read also highlights a relatively high

exposure to the financial sector, particularly

subordinated bonds of national champion banks

Top Multi-Asset Aggressive managers over 3 years

Name RankTotal

Return (% EUR)

Manager Ratio Contributing Fund Rating

Najib Nakad 1/215 78.65 1.06 HOF Hoorneman Value Fund

Stefan Nixel 2/215 63.76 1.05Allianz Strategy 75 - CT - EUR, Allianz Dynamic Multi Asset Strategy 75 - I - EUR

Michael Winker 3/215 57.69 1.03 Flaggschiff Dynamisch

Eva Balligand 4/215 61.47 0.93 Reactif

Michael Nipp 5/215 55.57 0.71 UniStrategie: Dynamisch

Average Manager 39.24

Top Multi-Asset Aggressive managers over 5 years

Name RankTotal

Return (% EUR)


Najib Nakad 1/158 76.75 0.48 HOF Hoorneman Value Fund

Michael Winker 2/158 66.45 0.43 Flaggschiff Dynamisch

François Badelon 3/158 81.08 0.18 Sextant Grand Large A

John Løvig Nielsen 4/158 50.68 0.07 Danske Invest Allocation Dynamic A

Michael Nipp 5/158 69.31 0.06 UniStrategie: Dynamisch






MULTI-ASSET > THE FUND MANAGERS

treat certain hybrid instruments.

‘After comparing the expected

returns with equities on a five-year

basis, the evidence was pretty

conclusive in terms of the

hybrid instruments

having a much

more favourable

risk return profile

in that sector.

‘We

believed the sector would continue to heal and

so put on a fairly large position,’ he says. ‘That

worked out very well.’

The fund has also had a strategic position in

Hong Kong in order to get that all-important

exposure to China. ‘This was to profit from

the growth of the Chinese middle class so our

exposure is mainly to consumer staples and

consumer discretionary,’ he says. ‘It’s a position

we’ve been increasing since 2012/13 and it’s still

one of the world’s cheaper markets.’

Although Nakad agrees that markets have

been very volatile over the past few years, he

maintains that the investment process followed

hasn’t changed in two decades.

‘We are value investors, so we look for solid

companies with reliable cash flows to invest in

at a reasonable valuation,’ he says. ‘Our bond

position is usually fairly aggressive compared

with an average mixed fund, in the sense that

generally the credit risk there is high yield, so

if we can find equity-type returns in the bond

market then we will take that position.’

On the equity side, the team is looking for

solid businesses with a good track record that

for some reason have become cheap. What’s

particularly important when these positions are

being examined is that there’s not too much

leverage, he says.

Looking ahead, Nakad believes the key to

success over the next few years will be risk

management. ‘A lot of things are hanging over

markets right now such as valuations, the US

interest rate cycle turning up, and the effect on

emerging markets,’ he says.

The European economy, for example, is

finally picking up because the banking system

is taking a long time to recover, while the drop

in the oil price will continue to help consumer

spending around the world.

‘We’re more focused on the downside

risk and being careful at the moment,’

Nakad says. ‘I’m not saying we’re

expecting a crash but just that we’re

not seeing that many great deals out

there so we’d rather be careful.’

ASTUTE FUND PICKINGExternal fund selection,

particularly as far as

European equity funds

are concerned, has

been a boost for

the UniStrategie:

Dynamisch fund

that pay a higher level of income than senior

issuance. The increasing regulatory pressures

require banks to strengthen their balance

sheets and this has benefited such bonds.

‘We also hold exposure to hybrid bonds

across other industries where we think the

issuer has a strong balance sheet and where

we are being paid a relatively attractive level of

income,’ he says. ‘Typically, these holdings are

focused on utility and telecom companies.’

WEIGHING THE RISKSSubordinated financials have also been the

main driver of performance for the HOF

Hoorneman Value Fund fund, according to its

manager, AA-rated Najib Nakad. ‘We built up a

large exposure in 2009 to subordinated bonds

in systemic north western European insurers

and banks,’ says Nakad, who is ranked first

over three and five years in the Mixed Assets –

Aggressive sector. ‘We looked at the landscape

after the financial crisis and what we expected

the regulators would do and how they would

‘We think it is right to continue

to base positioning on the

balance of risk and reward

rather than chase returns’

PAUL READINVESCO PERPETUAL




Top Multi-Asset Balanced managers over 3 years

Name RankTotal

Return (% EUR)


Paul Gagey 1/320 51.42 1.16 Aviva Patrimoine

Philippe Frisanco 2/320 12.98 1.11 Transatlantique Fund

Rudolf Gattringer 3/320 50.52 1.06 KEPLER Vorsorge Mixfonds A

Fátima Só 4/320 56.87 0.99Active Allocation Fd Global Active Alloc I Cap

Jan Bernhard 5/320 45.96 0.92 Fonds Assecura I - AT - EUR





Top Multi-Asset Balanced managers over 5 years

Name RankTotal

Return (% EUR)


Paul Gagey 1/245 58.25 0.67 Aviva Patrimoine

Petri Tuutti 2/245 68.02 0.57 VISIO Allocator

Rudolf Gattringer 3/245 62.15 0.55 KEPLER Vorsorge Mixfonds A

Philippe Frisanco 4/245 18.03 0.54 Transatlantique Fund

Luc De Ridder 5/245 38.76 0.41 Publitop Growth I Cap


ybrid instruments.

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ASTUTE FUND PICKIExternal fund s

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TUAL

SPONSORED STATEMENT

The rapidly changing nature of the investment

landscape and unpredictable levels of correlation

between traditional asset classes has seen

increased investor demand for portfolios that

combine genuine diversification and controlled

levels of volatility, as well as deliver alpha.

Invesco’s Multi Asset team has created an

unconstrained approach to investing, which it

believes can generate equity-like returns with

less than half the volatility of global equities.

Convinced that the only way to achieve true

diversification is to break away from asset class

constraints, the team instead focuses on finding

attractive investment ideas for its Invesco Global

Targeted Returns Fund, which aims to achieve a

gross return target of 5 percent p.a. above

3-month EURIBOR over a rolling three-year period,

with less than half the volatility of global equities*.

An unconstrained approachThe team’s investment approach is to find good,

long-term investment ideas, which can be

sourced from any asset class, anywhere in the

world. The team can then implement the ideas

using a wide range of traditional and alternative

investment instruments, including derivatives.

For example, the fund views volatility as a

source of potential return and as a portfolio

diversifier. In this respect, the team currently

implements an idea based on the relative pricing

of the volatility of the Australian dollar (AUD) and

the US dollar (USD). As a global reserve currency,

the USD is inherently more stable than the AUD,

a commodity currency of a much smaller

economy. However, the market is currently pricing

Australian dollar volatility at only a very small

premium to the volatility of the US dollar.

Invesco’s Multi Asset team believes a good way

to benefit from the difference is to buy the

volatility of the AUD and sell the volatility of the

USD. To do that, it can go long volatility in the

AUD, Japanese yen cross and, on the other side,

it can short volatility on the USD, Japanese yen

cross. The trade is anchored around the

Japanese yen but at the core it is about which

currency – AUD or USD – the team expects to be

more volatile over the next three years.

Risk-based fund managementWhile its approach to sourcing investment ideas

is unconstrained, the team applies robust risk

management tools in order to bring the ideas

together into a single, risk-managed portfolio.

The key is how all the ideas work together and

importantly how they interact with each other to

increase diversification and reduce the overall

risk of the fund.

Blending extensive quantitative analysis with

qualitative judgment to prevent the strategy

being guided by any one dominant behavioural

bias, the team focuses on the risk-return profile

of each idea and how to combine the ideas into

a single, risk-managed portfolio to achieve the

fund’s return and volatility targets over time.

Each idea must earn its place in the portfolio

and is assessed against the team’s central

economic outlook; the team also tests how the

portfolio and each idea would behave under

various historical, as well as hypothetical,

extreme scenarios. That way, the fund is

cushioned in negative market environments and

– at the same time – well positioned to

participate in positive markets.

To keep overall portfolio risk in check, the team

rigorously assesses and manages various risk

measures including total portfolio volatility, the risk

of each investment idea, asset type risk, market

factor risk and geographical risk. An ongoing

review process ensures that the underlying drivers

of each idea and its return potential are still intact.

The return projection for each idea needs to be

positive once any cost of managing the downside

risk – for example, through put options – has been

taken into account.

The way the fund is designed, it can achieve

its target return if most of its ideas work most of

the time. And, despite difficult markets since the

fund’s launch in December 2013, it remains on

track to achieve its return and volatility targets,

demonstrating the power of ideas and a truly

diversified portfolio.

INVESCO GLOBAL TARGETED RETURNS FUND – HARNESSING THE POWER OF IDEAS

Important information:This advertisement is exclusively for use by Professional Clients and Financial Advisers in Austria, Belgium, Germany, Greece, Finland, France, Italy, Luxembourg, The Netherlands, Norway, Portugal, Spain, Sweden and Qualified Investors in Switzerland only. This advertisement is by way of information only and no financial advice. Where Invesco has expressed views and opinions, these may change. The value of investments and any income will fluctuate (this may partly be the result of exchange-rate fluctuations) and investors may not get back the full amount invested. The fund will invest in derivatives (complex instruments) which will be significantly leveraged resulting in large fluctuations in the value of the fund. The fund may hold debt instruments which are of lower credit quality and may result in large fluctuations of the value of the fund. The fund may be exposed to counterparty risk should an entity with which the fund does business become insolvent resulting in financial loss. This counterparty risk is reduced by the Manager, through the use of collateral management. For more information on this fund, please refer to the most up to date relevant fund, share class-specific Key Investor Information Documents, the latest Annual or Interim Reports and the latest Prospectus. Whilst great care has been taken to ensure that the information contained herein is accurate, no responsibility can be accepted for any errors, mistakes or omissions or for any action taken in reliance thereon. Asset management services are provided by Invesco in accordance with appropriate local legislation and regulations. The fund is available only in jurisdictions where its promotion and sale is permitted. Please check the most recent version of the fund prospectus in relation to the criteria for the individual share classes and contact your local Invesco office for full details of the fund registration status in your jurisdiction. This document is issued in Germany by Invesco Asset Management Deutschland GmbH, An der Welle 5, D-60322 Frankfurt am Main. This document is issued in Austria by Invesco Asset Management Österreich GmbH, Rotenturmstrasse 16-18, A-1010 Wien and in Switzerland by Invesco Asset Management (Schweiz) AG, Talacker 34, CH-8001 Zürich, who acts as a representative for the funds distributed in Switzerland. Paying agent for the fund distributed in Switzerland: BNP PARIBAS SECURITIES SERVICES, Paris, succursale de Zurich, Selnaustrasse 16, CH-8002 Zürich. This fund is domiciled in Luxembourg. CE XXXX/2015

David MillarHead of Multi Asset Team

Henley-on-Thames

* There is no guarantee that these aims will be achieved.


MULTI-ASSET > THE FUND MANAGERS

managed by A-rated Michael Nipp over the last

few years.

‘It has worked out quite well and added

significant alpha to our fund,’ says Nipp, who

is ranked fifth over three and five years in the

Mixed Assets – Aggressive sector. ‘Evaluating

external funds on a quantitative and qualitative

basis is a key pillar of our investment process.’

From a regional perspective, a significant

position in European equities, especially German

ones, and Japanese equities since the end of

2014 had a positive effect. This was at the

expense of more defensive markets in Europe,

such as Switzerland, the UK and the US.

‘Being aware of the full spectrum of

the credit universe, we captured positive

performance from being invested in the global

high yield segment and in hybrids,’ he says. ‘We

also had significant long positions in the US

dollar during 2014 and 2015.’

Currently, the fund has around 80%




equity, 22% credit and 18% government

bond exposure, along with some single-digit

exposure in total return funds.

‘From an equity point of view, we

like the idea of using call options on

the S&P 500, DAX and Euro Stoxx

50 in the current environment of

very low expected volatility,’ Nipp

says. ‘We still like our holding in

short-duration US high yield which

offers a coupon of around 5%, and our

hybrid investments, which offer a

decent yield compared with

German government bonds

for example.’

BROAD AND BALANCEDDiversification has been

the name of the game for

A-rated Rudolf Gattringer,

manager of KEPLER

Vorsorge Mixfonds A, who is ranked third over

three and five years in the Mixed Assets –

Balanced sector. Rather than a handful of key

drivers, he suggests a diverse exposure across

asset classes has been pivotal.

‘At the moment there are around 170 different

bonds and about 110 equity names in the

portfolio,’ he says. ‘This structure was also very

similar in the past so there haven’t been huge

bets underpinning our strong performance.’

Gattringer names UnitedHealth, a healthcare

stock in the US as one standout performer.

‘We held this company for several years and

sold it after an excellent performance,’ he says.

As far as current positioning is concerned,

Gattringer says that asset allocation calls

are made on three to six-month views

and reviewed monthly. Presently,

he is neutral on bonds, slightly

underweight equities and slightly

overweight cash.

‘In the case of equities we are

overweight Japan and emerging

markets, and underweight

Continental Europe and

North America,’ he

says. ‘Our weightings

come from bottom-

up selection, such

as Japanese equities

being attractive in

both valuation

and quality.’

Top Multi-Asset Conservative managers over 3 years

Name RankTotal

Return (% EUR)


Stephanie Butcher

1/343 44.82 2.14 Invesco Pan European High Income A Acc EUR

Paul Causer 1/343 44.82 2.14 Invesco Pan European High Income A Acc EUR

Paul Read 1/343 44.82 2.14 Invesco Pan European High Income A Acc EUR

Alexander John Mark Michahelles

4/343 28.17 1.58 Nextam Partners Obbligazionario Misto

Svilen Katzarski 5/343 59.51 1.35DEGUSSA BANK-UNIVERSAL-RENTENFONDS





Top Multi-Asset Conservative managers over 5 years

Name RankTotal

Return (% EUR)


Tina Rönnholm 1/256 24.03 1.05 SEB 20 B

Manuel Miguel Sanabria

2/256 62.66 0.78 Bankia Fonduxo, FI

Paul Causer 3/256 66.53 0.71 Invesco Pan European High Income A Acc EUR

Paul Read 3/256 66.53 0.71 Invesco Pan European High Income A Acc EUR

David Dias 5/256 64.78 0.67 NB PPR


‘We’re more focused on the

downside risk and being careful

at the moment. I’m not saying

we’re expecting a crash but just

that we’re not seeing that many

great deals out there so we’d

rather be careful’

NAJIB NAKADHOF HOORNEMAN

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Co


THE VIEW AHEAD < MULTI-ASSET

Crossing multiple asset classes

can leave investors open to shocks

surfacing in surprise areas.

Rob Griffin reports on how

investors are sheltering from

potential storms


MULTI-ASSET > THE VIEW AHEAD

‘The taper tantrum of 2013

and the bond rout/EMD sell-

off earlier this year gave us a

flavour of the type of market

reaction we can expect in this

case, particularly if growth

elsewhere is still weak’

ANNA STUPNYTSKA FIDELITY WORLDWIDE INVESTMENT

These are challenging times for multi-asset

investors. Thanks to the extreme effects of

financial stimulation, economic uncertainty,

stock market volatility, and political wrangling,

there’s no clear consensus as to where they

should be focusing attention.

When you consider that most areas have

provided healthy returns since bottoming out

in 2009, now the task is seeking out which

have the most potential, says David Vickers,

managing director of multi-assets at Russell

Investments.

‘We’re struggling to find value in any asset

market and have for a long while,’ he says. ‘It’s

one of the most difficult periods as a multi-

asset manager to run money because most

markets are pricing above fair value.’

Despite being seven years into a bull run,

never before have we had zero rates across the

globe this late in the day, says Vickers. Not only

are defensive assets looking expensive at a time

when they are normally a lot cheaper but there

is currently no margin for safety.

‘A lot of factors are making me

uncomfortable, such as the lack of opportunities

and the low return expectations for all asset

classes,’ he says. ‘Economic growth around the

world isn’t abundantly healthy despite the fiscal

stimulus packages being pumped in, so one has

to be slightly concerned about what will happen

when that starts to be removed.’

Of course, a crucial element is the fact

that many of the economic forces that are

influencing global markets are without

precedent, he says. As a result no one knows

for sure what the longer-term impact will be

of issues such as moves by central banks and

regulatory restrictions.

TWO-SPEED MARKETSAnother key problem is that the world’s

financial markets are at different stages of the

economic cycle, says Paul Read, co-head of fixed

interest at Invesco Perpetual.

‘The US and UK are expected to raise interest

rates, while Europe remains at the policy

loosening stage with the ECB only recently

reaffirming its commitment to implement the

QE programme in full,’ he says.

As a result, US dollar and sterling-

denominated bond yields are currently higher

than in Europe. ‘In view of this, we have

increased exposure to US dollar-denominated

bonds where we are able to pick up relatively

attractive yields in large issues across a range of

very strong investment-grade names along with

some high yield opportunities,’ he says.

The outlook for global interest rates is vitally

important, says to Anna Stupnytska, global

economist at Fidelity Worldwide Investment,

who believes the stance of the Fed means it

remains high up on the list of potential risks for

investors.

‘With the first rate hike looming, the pace of

growth improvement in the US is key to watch

over the next few months,’ she says. ‘I believe

acceleration will be gradual, allowing the Fed to

stay on hold at least until the end of the year

and then to tighten at a measured pace.’

However, she points out that stronger-than-

expected signs of growth and/or inflation could

accelerate the pace of hikes. ‘The taper tantrum

of 2013 and the bond rout/EMD sell-off earlier

this year gave us a flavour of the type of market

reaction we can expect in this case, particularly

if growth elsewhere is still weak,’ she says.

There is no shortage of risks facing mixed

asset investors but arguably the most

dangerous are issues that people are not yet

considering could pose a threat to portfolios,

says Maria Municchi, an investment specialist

for multi-asset at M&G.

‘The real risk for an investment portfolio is

usually one you don’t expect,’ she says. ‘We’re


THE VIEW AHEAD < MULTI-ASSET

aware of many risks, such as US interest rates

and the Greek situation, which is why we have

to follow our own strategy and position the

portfolio on the basis of valuations.’

Such calls, she points out, are not easy to

make at the moment with very little in the way

of value on offer from the fixed income space,

aside from some relatively attractive emerging

market areas, such as Mexican bonds.

‘The most attractive opportunities are still

to be found within the equity space, although

these markets have been enjoying strong

performances so we need to be very selective

on which ones we are going to position

ourselves in,’ she says.

This is where regional and sector exposure

comes into play.

‘Within equities our preference is for some

of the European markets where we see that

valuations are still attractive on both an

absolute and relative basis, but also where

profits have remained relatively depressed

when compared with historic levels,’ she says.

As long as we continue to see an

improvement in fundamentals – and recent

data concerning company earnings is positive –

Municchi believes there will be upside potential,

particularly within peripheral European markets

such as Spain and Italy.

‘On a sector basis we’ve had a preference for

US banks which are interesting because they

are attractive from a valuation perspective,’

she says. ‘As well as a nice diversifier for the

portfolio, these also provide exposure to a

relatively attractive asset

class.’

The M&G approach is to

invest in a number of stocks

within this area – currently

the firm has exposure to 15

companies. ‘We prefer exposure to

the sector as a whole rather than

specifically to a named bank,’ she

says.

Emerging markets is another

area that Municchi is monitoring

closely. ‘Although some

valuations might look relatively

attractive, we have to be careful about the

fundamentals,’ she says. ‘That’s why we’re a bit

cautious on exposure at the moment.’

EYING EQUITIESNick Samouilhan, multi-asset fund manager

at Aviva Investors, echoes the consensus

of preferring equities. ‘It’s not that we find

equities particularly cheap, it’s just that you

can make the case for them being fairly valued,

while fixed income is very expensive,’ he says.

Investors also need to accept that they

will receive lower absolute returns from

equities than they have been used to in the

past as a result of valuations, he says. ‘We

are overweight Europe and Japan,’ he says.

‘Although the outlook for these regions and

economies is poor, the expectations are even

worse and that means it’s quite easy to surprise

on the upside.’

Samouilhan is also keen to emphasise

that the amount of economic backing – or

otherwise – on offer in different economies

plays its part. ‘The Bank of Japan and the ECB

are very supportive of boosting growth,’ he

says. ‘Contrast this with the UK and US where

economic growth is the exact opposite – very

robust and improving – but it also happens to

be largely in the price which makes it difficult to

beat those high expectations.’

As no-one has a crystal ball, anyone looking

to invest over the coming decade would be

wise to embrace diversification – with the vast

majority in equities, says Julian Chillingworth,

CIO at Rathbones .

He suggests exposure to the UK, the US,

Europe, as well as selectively to China and the

rest of Asia makes sense. Japan, meanwhile, is

also an increasingly attractive prospect.

‘We think the Japanese economy is

undergoing a renaissance,’ he says. ‘This is

partly due to the fact that they have realised

demographics are against them so they need to

do something to boost consumption, push up

wages and encourage more women into work.’

Japanese corporations have also woken

up, he says. ‘They realise they need to give

shareholders some return on their investments

and this has led to better corporate governance.

Japan is a good economy in the broadest

sense of the word and consequently we want

exposure to it.’

REVISITING COMMODITIESSo how about other asset classes? Well, they

may have suffered devastating falls in recent

months but Alastair Baker, multi-asset fund

manager at Schroders, insists that it’s wrong

to automatically discount commodities from

portfolios.

‘They have moved from an asset class that

we have more or less avoided for the past four

‘We are overweight Europe and

Japan. Although the outlook for

these regions and economies is

poor, the expectations are even

worse and that means it’s quite

easy to surprise on the upside’

NICK SAMOUILHANAVIVA INVESTORS


MULTI-ASSET > THE VIEW AHEAD

years to one that we are now considering more

carefully,’ he says. ‘They bring something new

to the portfolio as they are now being driven by

the idiosyncratic fundamentals of supply and

demand in the underlying markets.’

This makes them behave very differently to

equities and bonds, which may help to control

levels of portfolio risk. ‘It is the return potential

where there remains the greatest uncertainty.

Without supply discipline and stronger global

growth, commodities could continue to languish

at or below the current prices,’ he says.

However, the longer low prices persist and

the less investment occurs, the more likely

prices are to rise in the future. ‘Energy markets

look the most interesting to us as prices have

fallen dramatically and investment has been cut

back a lot,’ he says.

HEDGING YOUR BETSInvestors are also considering a full range

of financial instruments when constructing

portfolios. For example, Vadim Zlotnikov, chief

market strategist and co-head of multi-asset

solutions at AllianceBernstein, says exposure

to risk assets has been modestly reduced at the

same time as the of the equity exposure has

been implemented using call options.

‘This will serve to automatically reduce our

risk exposure if the market declines,’ he says.

‘Likewise, we used put options to buy downside

protection on oil prices.’

He also recommends maintaining what he

describes as a ‘modestly pro-cyclical stance’,

based on the assumption of a rebound in US

small business and household development.

‘Globally we see relatively few deep-value

opportunities, but the Greek crisis is starting to

cause valuation spreads in Europe to widen,’ he

says. ‘This is the region in which we have the

large value exposure. The key macro variable to

monitor is the continuation of credit creation,

which is needed to sustain the economic

recovery.’

Although investing in this climate is difficult,

there are still some broad conclusions that

can be drawn, according to Pierre Sarrau,

deputy chief investment officer of multi-asset

strategies at BlackRock.

Global growth should strengthen thanks to

several tailwinds, including lower oil prices that

provide a fiscal stimulus, he says. In addition,

a recovery is under way in the major advanced

economies.

‘Even in Europe, where the crisis has

left a toxic legacy of high leverage and

unemployment, there are certain tailwinds,

including the impact of quantitative easing,

healthier banks, fiscal policy that is no longer

contractionary, and structural reforms.’

What most people want to see over the

coming months is a continuation of decent

earnings growth from companies that will give

them increased optimism for the future, says

Vickers at Russell Investments.

‘There’s not much room for error at the

moment so you need more good news to

support valuations at these levels,’ he says.

‘Good, strong economic growth in Europe, the

continuation of moderate growth in the US, and

a softish landing in China would be great.’

‘Within equities our preference

is for some of the European

markets where we see that

valuations are still attractive

on both an absolute and

relative basis, but also

where profits have remained

relatively depressed when

compared with historic levels

MARIA MUNICCHIM&G

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Multi-Asset-Supplement-Sept-2015

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