The widening performance gap in charity multi-asset funds: Is it time to review your investment manager?

Investment Efficient governance Investment manager research Investment strategy Performance monitoring

Charlotte Gale Consultant

The gap between the best- and worst-performing charity multi-asset funds has widened – and for trustees, that makes manager selection more important than it has been for years.

In this blog, Charlotte Gale and William Platt draw on LCP’s extensive manager research coverage of charity multi-asset funds to examine the recent performance trends. They look at the potential causes of the widening performance gap and share how LCP’s independent oversight of investment managers can help charity trustees to assess whether there is merit in reviewing their multi-asset arrangements or wider strategic asset allocation.

The dispersion of returns amongst multi-asset funds will likely be concerning for charity investors, as the choice of manager will have a large impact on their investment performance and the charity’s ability to help further its mission. In light of this, now is a good time to perform a ‘health check’ of your investment arrangements and conduct an independent review of your multi-asset manager.

Five questions to start your investment health check:

Has your manager delivered competitive net of fees returns relative to similar multi-asset funds, not just against your CPI + X% objective?
Do you understand the reasons behind recent periods of underperformance or outperformance?
Do your manager's responsible investment and stewardship practices align with your charity's values and objectives?
Are you receiving good value for money, considering fees, performance, service and expertise?
Do you have confidence in the people managing your assets and the stability of the wider firm?

Request a health check

Explore the analysis below

Pooled multi-asset funds appeal to lots of charity investors, as they are a low governance way to gain exposure to multiple asset classes. They enable charities to invest in equities, bonds and alternatives (including property, infrastructure, currency, amongst others) in a single fund, with the fund manager being responsible for the asset allocation and stock selection decisions.

This active management approach relies heavily on the skill of each investment manager, and their ability to make these important decisions. As such, there is, unsurprisingly, a large dispersion in performance across these funds and the degree of success in meeting their objectives.

What’s more surprising, is that the dispersion of performance over the last few years has been noticeably wider than previous periods. We show in the chart the dispersion of calendar year performance over the last 10 years for 13 charity multi-asset funds, after the deduction of fees.

For each calendar year, the internal line represents the median performance, the box height is the range between the top 25% and bottom 25% funds, and the external vertical lines represent the overall range. As you can see, the gap between the best- and worst-performing charity multi-asset funds has widened over the last five years (in pink) compared with the prior five-years (in blue).

We show in the table below the performance ranking of the same 13 charity multi-asset funds over each of the last 10 calendar years, where Manager 1 is best performing and Manager 13 is worst performing.

Two of the three managers with the joint highest average ranking over the 10-year period (managers 4 and 5) have consistently delivered top-quartile performance, apart from the last couple of years. Managers 11 and 13 have generally been in the bottom quartile, but with the occasional year when their performance was at or near the top.

The table highlights an important point: consistently outperforming over long periods is difficult. Even managers with strong long-term track records can experience periods of relative underperformance.

This is why it is important to regularly review your investments and consider:

Whether the type of multi-asset fund you hold remains appropriate for your objectives and current market conditions.

The extent to which your multi-asset fund fits with your other investments and your overall portfolio.

Whether you could benefit from replacing your multi-asset fund with separate specialist investment managers for key asset classes, giving you greater control over how your portfolio is constructed.

We note that past performance is not a reliable indicator of future performance, so investment decisions should not be based solely on historical rankings. Performance should be considered alongside your objectives, risk tolerance, time horizon, costs and the role each investment plays within your overall portfolio.

We expect some of this recent dispersion is explainable from market trends, but some is likely caused by fund-specific factors on which investors can challenge their investment managers. Each of the funds included in this analysis is researched by LCP, and our multi-asset and equity specialists meet with the managers regularly to discuss their strategies.

Asset allocation between equities, bonds and alternative asset classes has been a key differentiator. Managers who maintained a higher allocation to equities and made use of a broader set of diversifying assets, such as gold and precious metals, outperformed those with more cautious asset allocation approaches.

Equities typically account for a high proportion of assets within these funds, so the approach to stock-picking for equity portfolios has been a significant contributor to the widening performance gap. Notable causes include:

1.

Factor or style bias in the equity portfolio construction
2.

Good versus poor stock selection
3.

Speed in responding to changes in market environment

For example, some of the recent underperformers have a high conviction 'quality' style bias, which means they prefer to invest in companies with strong balance sheets, stable margins and reliable cash generation. While many believe the quality style will outperform over the long-term - throughout the last couple of years, it has not fared well. This has been due to the persistent ‘risk on’ environment, market concentration in AI and tech stocks, and strong performance from some of the riskier and more highly leveraged companies.

The asset concentration and lack of style diversification of some funds over recent years, coupled with evidence of poorly timed stock selection decisions, has led them to significantly underperform their peer group and wider market indices.

Meanwhile, the outperformers over the last couple of years have tended to have more balanced and diversified equity portfolios, being more style-agnostic in nature, combined with more success in bottom-up, fundamental-driven stock selection decisions.

These differences in bias, active asset allocation and stock selection within funds have set the stage for wider dispersion in returns on actively managed funds in the last five years. In contrast to the last two decades of falling interest rates which have been a tail-wind for long duration assets like quality and growth stocks, recent years have been marked by an uneven post-pandemic recovery, high interest rates and inflation, increased geopolitical tension, energy price shocks, along with AI and tech concentration. This environment is set to remain, so we believe a rethink is required to adapt to these new circumstances.

What actions can charity investors take?

In light of this, now is a good time to perform a ‘health check’ of your investment arrangements and conduct an independent review of your multi-asset manager. Some managers are consistently underperforming the wider universe. However, they (and in turn, you) may not be aware of this, especially if you only compare performance versus a CPI +X% pa objective. Given the nature of these funds in which managers have discretion over asset allocation (and other) decisions, there is a lack of independent oversight, and so managers are effectively marking their own homework.

Beyond headline performance, charities should consider other factors with respect to investment managers too, such as:

Responsible investment practices – ensuring these line up with your charity’s objectives and beliefs;
Team – expertise and quality of the team. Are they effectively incentivised to deliver great performance for their clients, who controls them and how stable is the team?
Firm – financial strength, alignment of shareholders with client interests, and stability of ownership;
Quality of service – responsiveness, reporting, access to wider support and peripheral services for your charity; and
Fees and overall value for money (as this can also vary drastically fund to fund).

Against this backdrop, we have seen a marked up-tick this year in charities seeking a review of their investment arrangements. We have been working with a range of charities of varying sizes and objectives who have had these concerns, and we’ve helped them to carry out exercises to review their multi-asset manager. We have drawn on our research database and knowledge of funds to provide detailed independent oversight; understand and carefully weigh the reasons their manager is underperforming; and advise if we believe their manager remains suitable (despite recent underperformance) or should be reviewed.

Is your investment manager still the right fit? 

Five questions to start your investment health check:

Has your manager delivered competitive net of fees returns relative to similar multi-asset funds, not just against your CPI + X% objective?
Do you understand the reasons behind recent periods of underperformance or outperformance?
Do your manager's responsible investment, and stewardship practices align with your charity's values and objectives?
Are you receiving good value for money, considering fees, performance, service and expertise?
Do you have confidence in the people managing your assets and the stability of the wider firm?

If any of these questions are difficult to answer, it may be time for you to take a closer look at your investment arrangements and consider seeking independent oversight to ensure they remain fit for purpose.

If you think your charity or endowment could benefit from an unbiased review of its investment arrangements, get in touch and we'd be happy to talk through how we can help.

Your questions answered

: Comparing returns against a CPI +X% pa objective alone can mask underperformance. Trustees should also compare performance against suitable market indices and a peer group of comparable charity multi-asset funds, over rolling three- and five-year periods, and assess whether asset allocation and stock selection decisions explain the difference.

: There is no fixed requirement, but most charities carry out a formal review every three to five years, with lighter annual monitoring in between. A review is worth bringing forward if performance has diverged from peers, the investment team has changed, or the charity's objectives have shifted.

: A pooled fund that gives charities exposure to equities, bonds and alternatives in a single vehicle, with the manager responsible for asset allocation and stock selection. Often used as a low-governance option.

: Equity factors are measurable characteristics that have historically been associated with differences in equity returns and risks. Common factors include value (cheaper companies), growth (companies expected to grow), quality (financially robust companies) and momentum (companies whose share prices have recently performed strongly). A style bias occurs when a portfolio has a meaningful tilt towards one or more of these factors compared with its benchmark or the wider market.