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Multi-asset funds continue to be challenged when dynamically allocating risk during periods of trend reversals such as May/June 2013 and the subsequent months. The timing and magnitude of risk reduction and subsequent increasing of risk have had a material impact on cumulative performance. Calibration of dynamic risk budgeting techniques remains a work in progress, notably as risk metrics such as the VIX are becoming less robust indicators. In a context of rising interest rates, risk parity funds faced a difficult 2013, with an average fund return in Fitch's risk parity peer group of -0.1 per cent compared with 5.1 per cent for global flexible funds.
These challenges are likely to continue in markets characterised by low volatility, high asset correlation and upside pressure on interest rates.
Euro multi-asset fund inflows continued in 2H13, reaching €36.6 billion for the year to November 2013. Of the inflows, 75 per cent were to flexible funds (allocation at the discretion of manager) and conservative funds (with equity allocation at under 35 per cent). As a whole group, multi-asset funds have performed better in 2H13 compared with 1H13, with variance in fund performance mostly due to the level of allocation to higher-risk assets.
The report, "European Multi-Asset Funds Dashboard Dec 2013", is available at www.fitchratings.com.
Fund sector research is part of Fitch's on-going commitment to fund research and ratings. Fitch's Fund Quality Ratings combine Fitch's experience in qualitative fund analysis with rankings and performance data from Lipper, a Thomson Reuters company. Fitch's Fund Quality Ratings offer an independent, forward-looking assessment of a fund's key performance and risk attributes and consistency of longer-term returns, relative to peer group or benchmarks. The ratings focus on the fund manager's investment process, key fund performance drivers, risk management, and the quality of the fund's operational infrastructure.