Do multi-sector funds have a future?

By Penny Pryor

It's time multi-sector funds grew up and worked out what they can offer investors and how they can differentiate themselves from superannuation funds, according to Morningstar Australia's global head of alternatives Simon Scott.

Morningstar has just completed its Australian multisector review, upgrading its Morningstar Analyst Ratings for seven strategies, downgrading 17 strategies, initiating coverage of nine strategies, and ceasing covering one strategy. But there has been a sizeable increase in the number of downgrades in this review compared to previous reviews.

"They've got to figure out their identity, what they do differently and why they're a valid proposition, particularly given the fee levels are a fair bit higher than you see in a super product," Scott said.

"They can't just be super funds' little brothers."

A concentration of investment talent in superannuation funds' internal investment management teams may partly be to blame.

"I think a generalization would be to say ... the quality of the people in the groups managing these [multisector] products has sort of declined over the years," Scott said.

"Now maybe that's a function of the super funds internalizing everything and they're getting so large now that they're sucking up all of the investment talent that's out there that used to be in these multi-manager offerings."

Of the seven upgrades, four were from Bronze to Silver, the highest ranking in this review. The Perpetual Diversified Real Return Z was upgraded from Bronze to Silver, as were the Vanguard Diversified Balanced ETF, the Vanguard Growth Index and the Vanguard Life Strategy Growth.

The Perpetual fund had a fantastic 2020, according to Scott.

"Perpetual has managed that balance nicely between taking risk when it's warranted, but still protecting the overall portfolio, and the results have been just consistent and stable, which is why they're pretty much at the top of the category," he said.

In the 17 downgrades, one Advance fund, four AMP funds, and three Russell funds were downgraded from neutral to negative.

As well as a loss of talent from investment teams to superannuation funds, multi-sector funds have been very reliant on bank channels for inflows.

"They've got to stand on their own two feet and actually fight for that money as opposed to, you know, the captive audience that they've had before," Scott says.

"And to be fair, a lot of them have seen that and they've tryed to turn the ship around, but there's a lot of embedded ingrained processes and things that they need to get on top of."

If multi-sector funds want to be successful, they need to invest time into really understanding their purpose and look beyond existing as legacy products.

"You just think that they're these boring things that are running in the background, but you cumulatively add up the FUM involved in it and it's quite monstrous so there's still a high expectation on the people doing the job to make sure they are offering something that you can't just get from Vanguard at a much cheaper fee," Scott said.