Mixed funds have been experiencing a strong net outflow of assets for two years. A lower interest rate could reverse the negative trend, but for now, investors show little interest, said Morningstar analyst Thomas De fauw.
During the era of ultra-low interest rates, multi-asset funds were extremely popular, but their appeal has been fading for some time. According to Morningstar, European multi-asset funds saw a net outflow of “133.2 billion euros” from the third quarter of 2022 to the end of 2024.
“Most categories experienced a clear outflow, particularly defensive euro allocation funds,” according to De fauw. “Many multi-asset funds had a particularly bad 2022, prompting investors to exit. Rising interest rates led to a correction in both equities and bonds. This was a unique period, as a 60/40 portfolio has historically always been a good starting point for investors.”
Excessive costs
In addition to disappointment over performance, De fauw noted that competition from money market and bond funds also plays a role in the outflow. “To achieve a good yield, investors are no longer reliant on relatively expensive multi-asset funds but can turn to the bond market instead.”
Despite waning popularity, De fauw believed there is still a place for multi-asset funds. “They still offer a ready-made portfolio for retail investors who do not want to be actively involved but still seek broad risk diversification.” However, the high costs of mixed funds, around “1.5 percent” outside the Netherlands, are a thorn in his side. “Costs are gradually declining, and we expect the downward pressure to continue,” said De fauw.
The rise of passive investing is also affecting this category. “Since active equity and bond funds often fail to keep up with the index, many investors opt for a low-cost ETF. This is more challenging for allocation funds because they invest in multiple asset classes. As a result, only a handful of index multi-asset funds are available in Europe.”
In the long run, net inflows into multi-asset funds will normalise, De fauw believes. “Defensive and flexible allocation funds are likely to gain popularity if interest rates drop significantly. Additionally, it is important for bonds to resume their role as a buffer in a 60/40 portfolio. Last year, bonds provided protection against short-term stock market declines, and we want to see that happen more often.”
Income funds remain popular
Since bond yields have risen, the buffer is already more prominent. However, multi-asset fund managers still see little interest from investors, says the Morningstar analyst. An exception is multi-asset income funds, which aim to generate income through dividend stocks and high-yield bonds. This is particularly attractive for retirees as a supplement to their pension.
The dominant player in this category is the Allianz Income and Growth fund. With over “50 billion euros” under management, it is the largest mixed fund in Europe. The structure of this strategy entails additional risk, according to De fauw, as the high-yield component, equity portfolio, and allocation to convertibles can be highly correlated, particularly during periods of crisis.
Additionally, aggressive multi-asset funds with a global mandate managed to escape the negative sentiment in the sector. They also experienced net inflows in recent years. “While defensive funds disappointed due to falling prices of long-term government bonds, mixed funds with a high equity allocation benefited from market euphoria,” said De fauw.
Young investors, in particular, opt for aggressive mixed funds due to their long investment horizon. Cryptocurrencies also appeal to this demographic. However, the threshold for including cryptocurrencies in portfolios remains high, according to De Fauw. He points to Man Group, which recently launched a crypto fund that invests based on trends in cryptocurrency. “The asset manager observed reluctance among some of its clients and therefore has no plans to include crypto in its flagship strategies. Ultimately, cryptocurrencies will appear in mixed fund portfolios, but only as a small tactical allocation.”