James
Gard:
Euro
allocation
funds
have
been
underperforming
their
benchmarks
for
years.
Here
to
discuss
why
is
Se
Manager
Research
Analyst,
Thomas
DeFauw.
Thanks
for
joining
us,
Thomas.
You
published
a
piece
called
Multi-Asset
Investing:
A
Difficult
Sport.
Can
you
explain
why
it
is
a
difficult
sport?
Thomas
DeFauw:
Hey
James.
Thanks
for
having
me.
Yeah,
it
is
a
difficult
sport.
Of
course,
there’s
multiple
ways
to
look
at
multi-asset
portfolios.
The
classic
way
is
to
compare
them
to
a
blended
benchmark
of
stocks
and
bonds.
And
if
we
look
at
it
this
way,
euro
allocation
funds
have
clearly
struggled.
For
example,
the
moderate
allocation
category
underperformed
by
more
than
2
percentage
points
per
year
over
the
last
10
years.
And
the
main
reason
for
this
underperformance
is
simple.
It
can’t
be
stressed
enough,
but
it’s
fees.
So
basically,
60%
of
the
underperformance
is
caused
by
fees.
Last
year,
my
colleague
Matias
Möttölä
and
I
have
zoomed
in
on
this
aspect
and
discussed
cheaper
alternatives
that
investors
have,
like
building
your
own
portfolio.
But
in
this
report
that
we
discussed,
we
tackled
the
other
factors
that
drive
returns.
So
multi-asset
investors,
they
have
to
take
a
lot
of
decisions.
First,
there’s
the
allocation
between
stocks,
bonds
and
cash.
Then
there’s
the
choices
within
each
asset
class.
You
might
favour
value
over
growth
or
up
or
down
your
duration
or
credit
quality
in
the
bonds
sleeve.
JG:
Thanks
for
that.
And
you’re
saying
home
bias
is
also
quite
a
pertinent
factor
as
well.
TDF:
Yeah,
exactly.
I
mean,
many
decisions
add
up
to
results,
of
course.
And
then
home
bias
is
a
clear
example.
So,
we’ve
seen
that
European
multi-asset
managers
often
have
more
allocation
to
European
stocks.
And
those
have
been
a
detractor
versus
the
benchmark,
which
holds
a
higher
allocation
to
US
stocks.
That
is
the
allocation
part.
If
a
strategy
uses
actively
managed
underlying
strategies,
there’s
an
additional
layer
of
security
selection
within
each
sleeve
that
fund
buyers
also
have
to
consider.
JG:
Sure.
You
talked
about
strategic
and
tactical
asset
allocation
decision-making.
Can
you
give
us
an
idea
of
the
takeaways
from
that?
TDF:
Yes.
So,
the
main
driver
of
returns
is
what
we
call
strategic
asset
allocation.
So
simply
put,
this
is
the
target
allocation
between
stocks,
bonds
and
other
assets.
There
are
some
managers
that
rebalance
their
portfolio
close
to
those
targets.
And
there’s
also
those
that
have
more
leeway
to
have
more
flexibility
to
adjust
allocations
as
they
see
fit.
JG:
Sure.
So
that’s
strategic.
What
about
the
tactical
side
of
it?
TDF:
Yeah,
it’s
interesting
that
you
mentioned
that.
What
we
typically
see
is
that
the
call
for
dynamic
or
tactical
portfolio
positioning,
so
that’s
where
the
manager
frequently
changes
the
portfolio’s
allocation
in
anticipation
of
price
fluctuations,
that
call
typically
rings
louder
after
a
period
of
high
volatility,
like
we’ve
seen
in
2022.
But
like
many
researchers
before,
we’ve
struggled
to
detect
multi-asset
managers
that
master
this
art
of
tactical
allocation
over
long
cycles.
And
even
in
2023,
we
didn’t
see
many
market
timers
shine.
JG:
Sure.
Yeah,
that’s
not
surprising
really.
So,
what
would
you
say
is
the
main
takeaway
of
the
report
as
a
final
roundup?
TDF:
Yeah,
I
guess
one
of
the
main
observations
and
perhaps
lessons
to
investors
is
it’s
really
important
to
understand
the
strategy,
the
investment
process,
the
promises
that
are
made
by
managers
and
to
see
if
strategic
asset
allocation
and/or
security
selection
is
the
dominant
driver
of
performance
or
whether
tactical
trading
plays
a
role.
And
then
finally,
perhaps
some
nuance
to
the
story,
there
are
a
great
many,
what
we
call,
objectives
oriented
funds,
for
example,
multi-asset
income
that
makes
distributions
or
ETF
funds
that
have
goals
beyond
financial
returns.
So,
in
these,
there’s
a
specific
investment
outcome
to
consider.
And
all
the
work
that
goes
into
achieving
those
goals
is
not
always
captured
through
the
benchmark
relative
performance.
JG:
Sure.
So,
you
would
say
overall,
there’s
still
a
role
for
allocation
funds
in
some
investors’
portfolios
if
they
choose
wisely?
TDF:
Absolutely.
JG:
Excellent.
Well,
thanks
so
much
for
your
time
today,
Thomas.
For
Morningstar,
I’m
James
Gard.
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