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Fitch Aymeric Poizot

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Performance of flexible allocation funds disappointing, says Fitch report

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The recent performance of European flexible allocation funds calls for improvement in many investment processes and questions the capacity of some managers to be tactical allocators, says a new report from Fitch Ratings.

The report notes that, in 2011, funds in the EUR Lipper Flexible categories (-9.3%) underperformed more traditional balanced funds (-6.3%).

"The flexible allocation category is heterogeneous. Behind a disappointing average performance, one should not overlook that a third of flexible funds have had returns higher than -5% last year and 8% of funds had positive returns," says Aymeric Poizot, Managing Director in Fitch’s Fund and Asset Manager Rating Group.
2011 has been challenging, even for top performers. Volatility and liquidity shocks, high correlations and limited macro visibility penalised even the most agile managers. Fitch identifies three segments within the category: stock picking funds with active beta management, former balanced with more allocation latitude and judgemental or systematic global macro.

Fitch believes flexible funds continue to make sense for a wholesale distribution clientele that is looking for low volatility products. Nevertheless, the recent lack of downside protection calls for adjustments.

The ability to cut market exposure remains a key parameter. The diverging performance paths of flexible allocation funds and global macro hedge funds in H211 illustrates the long only culture of the former, some inertia in their decision making and a risk management too backward looking. In a market without trends and with volatility shocks, limiting downside risk requires investment processes to focus on volatility or liquidity driven signals and avoid excessive portfolio trading activity.

Most flexible allocation funds have adopted a tactical style with a short term time investment horizon. "Fitch believes that flexibility is not only a question of reactivity but also of freedom in the choice of asset classes, themes and sectors. Investment processes would gain in complementing the tactical engine with a more fundamental, unconstrained, longer-term layer based on assets’ risk/return profile," adds Manuel Arrive, Senior Director in Fitch’s Fund and Asset Manager Rating Group.
 

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