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Recent asset class re-correlation challenges multi-asset funds on the downside, says Fitch

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Multi-asset funds have recently suffered from asset re-correlation in its H1 2013 multi-asset fund dashboard and peer group analysis, according to Fitch Ratings.

 
For the first time in three years, equity/bond correlations are positive in falling markets. Fitch expects multi-asset funds to increasingly have to use cash, short duration assets or derivative hedging, as there is no obvious place to hide in the transition to less accommodative monetary policies.
 
As the transition is unlikely to be a smooth process, multi-asset fund managers will also be challenged in their ability to adjust portfolios without excessive churning.
 
In the past 12 months, multi-asset fund performance has primarily been driven by market liquidity, supported by ECB president Draghi’s July 2012 speech and stimulus measures from the US Federal Reserve. When concerns emerged in mid-May that the Federal Reserve would reduce market support, it is no surprise that markets returned to a “risk-off” phase. Global multi-asset funds have suffered relatively more than European focused funds, the former being more exposed to those assets driven by USD liquidity, in particular US high yield, currencies and emerging market debt.
 
Multi-asset funds have attracted considerable flows in 2013 to May, totalling EUR22bn, much greater than 2012 inflows of EUR4bn. Flexible funds, those whose allocation is solely at the manager’s discretion, attracted the majority of inflows in 2013, totalling approximately EUR11bn.

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