New risk budgeting techniques challenged in multi-asset funds

09 January 2014   Category: News, Global, Europe   By Asia Asset Management

Fitch Ratings says in a new report that multi-asset funds which use new risk budgeting techniques, such as dynamic risk budgeting and risk parity approaches, were challenged in 2H13. By contrast, funds that have been more static with low exposure to duration and high exposure to equity and high yield have performed better.

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% compared with 5.1% 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.

According to the report entitled European Multi-Asset Funds Dashboard Dec 2013, Euro multi-asset fund inflows continued in 2H13, reaching €36.6 billion (US$4.9 billion) for the year to November 2013. Of the inflows, 75% were to flexible funds (allocation at the discretion of manager) and conservative funds (with equity allocation at under 35%). 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.