Schroders mulls global version of Asian multi-asset fund

UK-based Schroder Investment Management is considering launching a global version of its Asian high-yield multi-asset fund amid signs such a vehicle may be growing in popularity.

The Schroder Asian Asset Income Fund, which went through a three-week subscription period before it started trading on June 27 this year, has gleaned close to $800 million among retail investors already, says Richard Coghlan, head of the firm’s multi-asset team in Hong Kong.

He says the fund house is also in the process of registering an identically managed fund as a Ucits III product domiciled in Luxembourg and is hopeful it will be available by the end of this year or early next.

"We are considering doing a global version of this fund as well as a Ucits III version and my expectation is that both will be available to investors in the early part of next year," says Coghlan.

Asked about the target size of its Asian Asset Income Fund, he replies: “This is something we are talking about. When we initially launched the fund we did not think we would have this problem so quickly. Our current view is that at $2 billion we will have hit our target capacity.”

Multi-asset strategies have always been viewed as a useful diversification play. However, during the 2008 global financial crisis when all asset classes converged to one, there became a need for more dynamic allocation using instruments to hedge market risk.

Demand for risk-adjusted returns has also spawned renewed interest in absolute return strategies that adopt shorting, although investors remain wary of hedge funds and funds of hedge funds on the back of liquidity and transparency concerns.

Mark Serocold, Schroders' business development manager for private banks distribution in Asia, says private banks have tended to prefer balanced funds because their clients want to see the names of the securities they are invested in. This has meant that sales of “true” multi-asset portfolios, including alternatives and possibly funds-of-funds structures, have not been good.

"But I think that attitude will change," he adds. "The markets are likely to be difficult for some time and investors have already started looking for solutions. We're emphasising to clients that it will pay off in the long run to be well diversified across Asian assets as well as having an active currency overlay and also a strong emphasis on protecting downside. So far the signs are positive. This could be the turning point for this kind of vehicle's popularity."

Coghlan admits that Schroders usually prefers to adopt a fund-of-funds approach with multi-asset strategies. “But we were convinced by our retail distribution team that distributors [in Hong Kong] want 100% transparency, which they feel they won’t get with fund of funds,” he says. “We believe we actually deliver that [transparency], but [distributors] want it direct.”

He explains that the Asian Asset Income Fund only invests in liquid assets with daily pricing, but says distributors are still not interested. “I think they will be, in time,” he adds. “Fund of funds was the place to be in the retail space six years ago. I think it will come back.”

The Schroder Asian Asset Income Fund targets a 6% return and can invest 30-70% of its assets in Asian high-yield bonds, 30-70% in Asia high-dividend equities, 0-30% in cash and 0-10% in other asset classes, primarily commodities and real estate securities.

Coghlan sees a 6% return as sustainable, noting its fixed income assets are currently yielding 7.2% and its equities 5.9% following the recent market sell-off.

He adds: “On the equity yield side, I think that companies are selling down their investments and building up cash reserves and as a result we are starting to see higher dividend roll-outs, so we think this is the place to be if you are yield-starved.”

Schroders also reports interest in its Asian Diversified Growth Fund, which is up 33% since inception in February 2009 but down -2.06% this year-to-date. As fund manager, Coghlan uses futures to hedge market risk and extend duration and takes active currency positions.

While the fund had a 62% exposure to equities when S&P downgraded the US long-term credit rating, 30% of this was in options – a hedging trend he believes will continue across the fund industry.

“We are seeing more interest through private banking channels for this [Asian Diversified Growth Fund] again,” he says, noting that private banks like to have an alternative on their shelf even if they have a similar in-house product in cases where investors are wary of potential conflict of interest.

The fund has received institutional money and is nearing its critical three-year track record period. Coghlan points out that Schroders has a similar growth strategy in the UK, where interest is largely institutional.

“One of my colleagues on the multi-asset team in Switzerland has been asking for [Asian Diversified Growth Fund] product materials because he has clients interested in taking a look,” he adds. “They have talked about me going over there to do a roadshow.

“When investors diversify into Asia, typically it is into an equity or a bond fund, so why not invest in a more diversified product?”