RPT-Fitch: New Risk Budgeting Techniques Challenged in Multi-Asset Funds

Wed Jan 8, 2014 4:18am EST

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Jan 8 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings says in a new report that multi-asset funds which use new risk budgeting techniques, such as dynamic risk budgeting and risk parity approaches, were challenged in 2H13. By contrast, funds that have been more static with low exposure to duration and high exposure to equity and high yield have performed better.

Multi-asset funds continue to be challenged when dynamically allocating risk during periods of trend reversals such as May/June 2013 and the subsequent months. The timing and magnitude of risk reduction and subsequent increasing of risk have had a material impact on cumulative performance. Calibration of dynamic risk budgeting techniques remains a work in progress, notably as risk metrics such as the VIX are becoming less robust indicators. In a context of rising interest rates, risk parity funds faced a difficult 2013, with an average fund return in Fitch's risk parity peer group of -0.1% compared with 5.1% for global flexible funds.

These challenges are likely to continue in markets characterised by low volatility, high asset correlation and upside pressure on interest rates. Euro multi-asset fund inflows continued in 2H13, reaching EUR36.6bn for the year to November 2013. Of the inflows, 75% were to flexible funds (allocation at the discretion of manager) and conservative funds (with equity allocation at under 35%). As a whole group, multi-asset funds have performed better in 2H13 compared with 1H13, with variance in fund performance mostly due to the level of allocation to higher-risk assets.

The report, "European Multi-Asset Funds Dashboard Dec 2013", is available at www.fitchratings.com or by clicking on the link below.

Link to Fitch Ratings' Report: European Multi-Asset Funds Dashboard 2H13

here

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