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Are Multi-Asset Funds A Threat To The Fund Industry?

By Detlef Glow The chase for yield by all kinds of investors has driven up the popularity of so-called multi-asset funds, since the funds promise to be widely diversified and therefore able to generate returns from all kinds of assets. In a number of cases the promise also extends to all kinds of market conditions, since some of the funds have the ability to use shorts or so-called market-neutral strategies. With regard to the investment objectives of multi-asset funds, these funds can be considered as really actively managed funds. That mixed- or multi-asset funds are privileged products for European investors is shown in the impressive inflows these funds have been able to gather. Asset allocation funds were not only the best selling fund sector for 2013 (+€61.6 bn), they also led the table for the first 11 months of 2014. In this period asset allocation products gathered €63.3 bn, far ahead of the second and third best selling sectors: mixed-asset conservative (+€27.9 bn) and bonds EUR (+€27.5 bn). The strong inflows into the multi-asset sector, combined with the fact that more and more fund promoters are launching multi-asset products to benefit from this trend, have raised questions and concerns about multi-asset products. One of these questions is whether all of these new managers are able to handle multi-asset portfolios, especially in tough times. Will these managers be able to meet the expectations of their investors in bear markets? The fear behind this question is linked to the negative image of the fund industry that stemmed from a number of absolute return funds failing to meet their goals during the 2008 financial crisis. From my point of view this is a valid concern: some managers may not be able to handle rough markets. They might not be experienced in the use of shorts, or they may not have the right risk management tools in place. Another point of concern is that some asset managers try to run their multi-asset portfolios with small teams to cover a large number of asset classes, or they are managing these portfolios in addition to other portfolio management tasks. In this regard, investors should make sure the fund management team of their fund is focused on the multi-asset portfolio and has enough resources to handle all the asset classes in the portfolio. The second major concern I have heard often in recent months is about fund flows. Since multi-asset products seem to have been the investment of choice of both institutional/professional and private investors in the past two years, some observers state that the flows might have reached their peak. Investors may start to pull out their money from these funds, which could lead to major outflows and therefore disruptions in some asset classes. I do not think that private investors will stop investing in multi-asset products as long as the funds fulfill their investment objectives and the goals of the investors. But it looks a bit different on the institutional side. New regulations such as Solvency II, with its high reporting standards, may cause some outflows from mutual funds, regardless of whether the fund promoters are able to deliver holdings data and other statistics on time. Another reason for outflows might be because asset managers are using multi-asset funds instead of buying the single building blocks and building multi-asset portfolios of their own. That would be the only way for them to have their asset allocation fully under control. From my point of view both concerns are valid; institutional outflows could easily offset inflows, which might cause outflows from the asset allocation sector. Even so, I would not expect any major disruptions in the utilized asset classes from this, since major outflows are unlikely to happen from one day to the next. In addition, I don’t think all the institutional investors who have bought multi-asset funds are able to manage this kind of portfolio in-house and therefore need an external manager to participate in these broadly diversified investment strategies. I would assume some questions and concerns around multi-asset funds are valid, but as long as at least the major funds in this market segment continue to deliver on their investment objective, the fund category is not a major threat for the European mutual fund industry. From my point of view, the major risk for the fund industry would be if one of the top-selling funds in this segment fails to deliver on its investment objective or faces major losses during a crisis. That would once again damage the reputation of the fund industry, which might then irrevocably lose investors’ trust. The views expressed are the views of the author, not necessarily those of Thomson Reuters.

Go Long SPY Now – Market Turn At Hand

The market has accounted for its fear of the ECB and Greece year-to-date, and I believe stocks have mostly sold off in 2015 because of rumors around these events. But as rumor fades into news, stocks are poised to enjoy a relief rally, and SPY is already off its lows marked on January 15. While the Greek election results are likely to revive some fear next week, I am already taking long stakes in stocks and view SPY okay to buy in increments. It’s time to start going long the SPDR S&P 500 Trust ETF (NYSE: SPY ), aka the U.S. market, as I see a turn sometime between last week’s low and the end of the month. If I am correct that the European Central Bank (ECB) action and the Greek election and its potential repercussions have greatly swayed currencies, commodities and stocks year-to-date, then a turn may be in store in the very near-term. My reasoning is based on my belief that stocks have mostly priced in worst case scenario fueled fear, and that reality will be much less scary than expectations. Stocks seem to have already found stability, with a recent bottom marked on January 15 for SPY; and many names are rising into their earnings events now, some of which I have taken long stakes in over the past week. I’ll talk about those in dedicated articles. The market has priced in a ton of fear year-to-date, I believe around the Greek election and its potential election to drop out of (or be dropped out of) the euro-zone thereafter if the big demands of its expected new leadership are not met. But, I expect the end result of events in Greece will prove much less threatening than the market has priced in, offering opportunity for relief rally as events unfold this weekend and next month. Thus, we appear to have set up for a sell the rumor, buy the news turn of events, and it’s about time to start buying in increments here. Volatility has dropped off significantly over the last two trading days, and I’m pulling my hair out for not taking that short position in the iPath S&P 500 VIX Short Term Futures ETN (NYSE: VXX ) I had been contemplating through put options. We may get another spike in the VXX Monday after the Greek election results come in, so there could be another opportunity yet. But as for the market generally, I think it’s okay to start taking stakes in stocks again and the SPDR S&P 500 is a great way to do that. I surveyed some of my Greek contacts and have contemplated the situation; there seems to be the possibility that risk may have been overly priced into stocks around the Greek election due on Sunday. The new disruptive political party Wall Street and Brussels are concerned about, Syriza, is not the threat to European and global stability our press indicates it is. Yes, Syriza will push for renegotiation of the terms of the money Greece owes its European partners and other parties, but it will not default on that debt in my view. In other words, a Grexit is not going to happen as far as I see it. SPY’s page at Seeking Alpha shows it is only down 1.2% year-to-date after gaining back roughly 2.9% since the January 15 close. Many pundits I’ve seen talk about the market seem to conclude the valuation of the S&P 500 Index is not so cheap, with an index P/E multiple of roughly 18.8X, versus historical mean closer to 15.5X. However, the index multiple on forward estimates is 16.65X according to the WSJ page linked to above. Let’s not forget that our economy is growing at an accelerating pace and that the unemployment rate has been decreasing at a better than expected rate. Europe has its stimulus now, but the region’s decline and even China’s slowing growth are not a huge a threat to our economy anyway; that is especially true now that gasoline prices have come down so much (I’m looking for oil prices to stabilize and rise soon). My friends, I say face fear and start buying stocks now in increments and more so as we get passed this Greek election event. It will drive fear again into stocks next week, but I expect that would only open further opportunity for U.S. investors to buy SPY and stocks generally for benefit later this year. This thing has been overblown. My mouth is watering over some of the valuations I see considering this economy’s strength, so I’m gritting my teeth and buying stocks.

A New Income Oriented Multi-Asset ETF Hits The Market

Income investing has been on a tear since last year thanks to the plunge in bond yields. Global growth worries, a relentless slide in oil prices, QE talks in the Euro zone, a ‘patient’ Fed and stepped-up stimulus in Japan resulted in easy money policies across the developed world and in turn dragged yields down. This spurred many issuers to put out new products in this income space, greatly enhancing the number of options at investors’ disposal in this key market segment. Many may think that the income investing space is stuffed, leaving no scope for a new theme to perk up investors’ mood. To prove this group wrong, Master Shares recently released a pass-through ETF with an alternative focus, this time on income. The ETF trades under the name of the Master Income ETF (NYSEARCA: HIPS ). Let’s dig deeper. HIPS in Focus The fund looks to track the TFMS HIPS 300 Index, focusing on 300 securities with a pass-through structure. This is done by looking at securities from the sectors including closed-end fund (CEFs), mREITs, commercial/residential/diversified REITs, business development companies and MLPs. The fund charges 87 bps in fees. How Could it Fit in a Portfolio? The fund does look to be a great way to play the alternative securities space in an ETF form, while its yield will be tough to beat. The current period of low interest rates makes this income paying ETF quite attractive. Investors should note that high income paying securities play a defensive role in a portfolio and help to reduce overall volatility in uncertain times. The pass-through structure is basically created to avoid the effects of double taxation. The product could also be an interesting choice for those reluctant to invest in the regular ways of income investing like junk bonds or high-dividend equities. The constituents of the portfolio are un-correlated in nature and bear less relationship with the typical bond and stock exchanges. Thus, barring the income lure, the product should go a long way in hedging marketing volatility in the portfolio. ETF Competition Since the high yield space sees tough competition due to relentless launches over the last two years, the issuer gave this product an unusual packaging to set it apart from the regular pack. Still, some high income products with a focus on alternative securities are presently operating in the market. These include the likes of the ETRACS Diversified High Income ETN (NYSEARCA: DVHI ), the iShares Morningstar Multi-Asset Income Index ETF (BATS: IYLD ), the SPDR Income Allocation ETF (NYSEARCA: INKM ), the Guggenheim Multi-Asset Income ETF (NYSEARCA: CVY ), the First Trust Multi-Asset Diversified Income Index ETF (NASDAQ: MDIV ) and the YieldShares High Income ETF (NYSEARCA: YYY ). Expense ratio wise, the newly launched ETF looks reasonable as other products charge in the range of 60 bps to 165 bps a year. This is especially true given the product’s focus on pass-through entities and wide coverage from CEFs to MLPs. However, to be a winner in a long-distance race, the issuer should dedicatedly focus on the income part of the ETF. Notably, YYY holds the status of the highest yielding product in the space of diversified ETFs, having yielded about 9.6% as of January 13, 2015. To live up to investors’ expectations, the fund should offer something around that high benchmark, otherwise it could be somewhat prohibitive to asset accumulation, at least to those who are highly yield-starved.