The number of multi-asset fund launches in the UK and Europe has fallen to a multi year low in recent times, according to Morningstar today's (27 February) published report on this sector's trends.
It found that multi-asset funds have struggled against benchmarks, flexible and cautious strategies have recently faced outflows in both regions, and fees in Europe remain higher than in the UK.
Tom Mills, principal of multi-asset strategies, Morningstar, said: “While multi-asset fund fees are steadily decreasing in both the UK and Europe, they’ve fallen further and faster in the UK market, which has seen a much bigger embrace of lower-cost allocation funds, such as index-based allocation strategies.
"In Europe, higher costs prevail, with differences in regulation and distribution models helping to explain the gap. The growth of managed portfolio services in the UK has put additional pressure on multi-asset fund fees.
“In both the regions, flexible and cautious strategies have recently faced outflows, with higher interest rates and bond yields since 2022 playing a part.
“Over the past decade multi-asset funds in GBP, EUR, and USD allocation categories have struggled to outperform Morningstar benchmarks due to fees, asset allocation, security selection and market timing attempts. While these factors are unlikely to reverse, the remarkable outperformance of US equities likely compounded the challenge of beating market indexes over the past decade.”
Further report highlights cited include that multi-asset funds in the GBP, EUR, and USD allocation Morningstar Categories have struggled to outperform their category indexes thanks to the effect of fees, as well as their asset allocation, security selection, and market-timing efforts.
In recent years, the more aggressive categories have underperformed their indexes the most, as equity market performance has been more narrowly led than usual, adding to security selection challenges. The massive outperformance of US stocks has been a huge headwind for globally oriented categories.
The median cost of new share classes has been trending steadily downward, while higher-cost classes are more likely to close or merge. Fund costs have fallen further and faster in Britain, however.
In the UK, more costly offerings, such as active funds of funds, have lost popularity, while lower-cost index-based allocation portfolios have attracted significant assets. But despite typically lower fees, this type of strategy—often offered in an exchange-traded fund wrapper—has yet to achieve the same success elsewhere in Europe.
Differences in regulation and fund distribution models are key explanatory factors.
In the UK, managed portfolio services have added to the competition in multi-asset.
In the UK-domiciled GBP allocation categories, only the more adventurous 60-80% equity and 80%+ equity categories have received net inflows in the past three years. The biggest loser by far was the GBP flexible-allocation category, where managers cite investors’ response to higher bond yields since 2022.
Elsewhere in Europe, EUR cautious allocation–global funds were hit hardest as they faced competition from fixed-income and money market funds, whereas the EUR aggressive allocation–global category received net inflows in the past three years.
