4/5/2023. Nope. Moreover, a DIY investor, holding one equity fund and one bond fund, would have outperformed, for equivalent volatility.
Last week, at the Professional Adviser 2023 Awards, the Rathbone Multi-Asset Strategic Growth Portfolio S Acc GBP Fund (ISIN:GB00B86QF242, SEDOL:B86QF24) was awarded Winner in the Best Balanced Fund category.
The PA Awards category shortlist included many famous names:
Quite an accolade for Rathbone, and solid recognition for the fund managers David Coombs and Will McIntosh-Whyte. Naturally, everyone knows that such industry awards are hard-won, with candidates being rigorously assessed against numerous criteria, under a robust process of fairness and scrutiny. (Ahem. I say this as Winner of Best Financial Planner, Open Category, in FPAS 2018 Awards in Singapore.) So, the Rathbone fund is indubitably good, as attested by the GBP £1.8 billion of investors’ money it deploys.
Benchmarking The Fund
The Rathbone Multi-Asset Strategic Growth Portfolio S Acc GBP fund lies in the Morningstar GBP Allocation 60-80% Equity Category, delineating the proportion of equity holdings within the portfolio asset allocation.
The fund is further considered ‘volatility managed’, meaning that the managers aim to restrict the fund’s return volatility. According to the factsheet, this target is two-thirds the volatility of the FTSE Developed Index, which represents the capitalisation-weighted performance of 98% of listed equity in global developed markets. The fund benchmarks itself against the UK’s Consumer Price Index +3%, because “we aim to grow your investment above inflation”.
As Dan Lefkovitz of Morningstar noted in November 2020, it can be difficult to judge the performance of multi-asset funds. Benchmarking a multi-asset strategy differs substantively from a managed strategy focused on a single-asset class.
Morningstar and the FT benchmark the Rathbone fund against Morningstar’s UK Moderately Adventurous Target Allocation index, with such funds having “a mandate to invest in a range of asset types including equities, bonds, property, commodities, cash and liquid alternatives for a GBP-based investor”.
If we dig in to how the Morningstar Target Allocation indices are built, we see that although they are constituted from other Morningstar indices, the constituent weights are determined by the peer-group. They take the average asset allocations across all funds in the category, removing outliers, and then rescale the holding percentages to match a 70% equity target (in the case of the Moderately Adventurous version of the index). As Dan’s article says, “This aligns the indexes with actual investment behavior of multi-asset managers.”
Benchmarking Independently of the Peer-Group – The PIPS Benchmark
Whilst their construction may be methodologically rigorous and rules-based, the Morningstar Target Allocation indices are not independent. Each index is a systematised version of the peer-group average allocation. Using such indices to benchmark a fund’s performance can be helpful when referencing against the category, but it is not an independent metric. It’s fine to be front-runner of the pack, but we should check whether the pack itself is running slow.
This is the reason that Passive Index Portfolios (PIPS) are a useful approach to benchmarking multi-asset funds and portfolios. We can examine the PA Awards shortlisted funds above by plotting versus PIPS - a simple locus of [E% MSCI World Index + 1-E% Bloomberg Global Aggregate H-GBP] on a risk-return chart.
Chart - PA Awards Balanced Fund Shortlist vs PIPS (3 Years)
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We see immediately that over a three-year period, each of the shortlisted funds has delivered a risk-return trade-off (i.e. performance vs volatility) similar or better than the PIPS benchmark. That’s pretty good, and the shortlisting committee have apparently been wise in their selections.
But three years is a rather short period for observation, especially as a large proportion of funds in the category are designed to be stand-alone ‘all-in-one’ portfolios, or portfolio cores held for a long time.
Let’s look at five years versus PIPS (noting that fewer funds have this track record). We see in the chart below, that only two of five have outperformed PIPS.
Chart - PA Awards Balanced Fund Shortlist vs PIPS (5 Years)
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Finally, here’s seven years. Only two of four funds are similar or better than PIPS.
Chart - PA Awards Balanced Fund Shortlist vs PIPS (7 Years)
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This examination of multi-asset fund performance against an independent benchmark resonates with the data for single-asset funds, such as that from SPIVA. In the long run, a smaller and smaller percentage of funds will beat the benchmark. For example, in the USA Large Cap sector, 25.73% of funds outperformed the benchmark (S&P 500 index) over three years, but only 8.59% outperformed over ten years. For fifteen years, the figure is 6.60%.
When I looked at ten years of data for every GBP multi-asset fund on Citywire, only 1% of 601 funds outperformed PIPS.
Chart - All Citywire GBP Multi-Asset Funds vs PIPS (10 Years)
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Choosing A Suitable PIPS Benchmark
If we plot the Rathbone Multi-Asset Strategic Growth fund versus the PIPS line for a ten-year period, to select a suitable individual index to use as benchmark, we could select the “Walkers PIPS GBP Index 55E”, as it has approximately similar volatility.
Chart - Selecting A Suitable PIPS Benchmark for Rathbone Strategic Growth Fund
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This ‘55E’ PIPS benchmark is 55% MSCI World Index combined with 45% Bloomberg Global Aggregate Hedged-GBP, rebalanced annually. This is one of the simplest 55% Equity / 45% Bond portfolios possible.
Here’s the relative performance of the Rathbone fund versus our selected PIPS benchmark, from start of data.
Chart - Performance of Rathbone Strategic Growth Fund vs PIPS 55E Index
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We see that the Rathbone Multi-Asset Strategic Growth Portfolio A Acc GBP fund has not outperformed the PIPS benchmark. I am not saying that Rathbones is a bad fund, just that the PIPS-55E index is probably a valid benchmark. The volatility is almost identical, and correlation is a positive 0.91 over ten years.
Because the Rathbone fund is a real-world managed fund with fees and costs, it will be interesting to see comparative performance versus an investible tracker of the PIPS benchmark.
Comparing The Rathbone Fund With An Investible PIPS Tracker
Since PIPS benchmarks are constructed from indices, they are not directly accessible. But the constituents themselves are easily investible. One implementation of a Walkers PIPS GBP Tracker 55E would be 55% iShares MSCI World UCITS ETF plus 45% Vanguard Global Bond Index H-GBP.
Here’s a chart for ten years performance, below. Over this period, a DIY investor holding only one equity fund and one bond fund would have outperformed the Rathbone fund by 13%.
Chart - Performance of Rathbone Strategic Growth Fund vs PIPS 55E Tracker (10 Years)
Click to enlarge
Below is a five-year performance chart. Over this period, a DIY investor holding only one equity fund and one bond fund would have outperformed Rathbone fund by 6%.
Chart - Performance of Rathbone Strategic Growth Fund vs PIPS 55E Tracker (5 Years)
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Below is a two-year chart. The performances are near identical.
Chart - Performance of Rathbone Strategic Growth Fund vs PIPS 55E Tracker (12Years)
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This above is an interesting result. The last two years in global markets have been a white-knuckle ride, for both stocks and bonds. This is supposed to be the environment where active investing does better than passive investing, according to proponents.
But here we see that an award-winning actively managed portfolio has delivered no enhancement compared to a simple passive index portfolio.
This is staggering, because the Rathbone managers have the entire universe of global stocks and bonds to choose from, plus alternative investments and private equity, and can switch in or out of investments at any time. Whereas PIPS is just two holdings with only a single rebalancing each year.
I don’t single out the Rathbone fund for special pillorying. In fact, the opposite. If you are in the market for a multi-asset fund, actively managed by lots of undoubtably smart people, with the psychological comfort of a well-known brand, and the social proof of a fund-size in the billions, then Rathbone Strategic Growth isn’t out of place on the shortlist.
In terms of risk-return performance, the Rathbone fund is amongst the leaders in the sector. It just hasn't performed as well as a simple PIPS tracker with the same volatility.
Conclusion
- Managing a multi-asset portfolio is difficult. With great potential for more complexity than in the single-asset world, because managers have a huge universe of assets to choose from.
- Managers of multi-asset funds and discretionary portfolios generally compare themselves against the peer-group, because independent benchmarks are scarce. This ignores the risk that the peer-group itself is silently underperforming.
- This doesn’t need to be the case. Benchmarking using a independent passive index portfolio (PIPS) is a valid approach, and can help to keep focus on simplicity over complexity.
Charts and data courtesy of FEfundinfo, with appreciation.