Multi-asset funds using the traditional 60/40 equities/bonds allocation model will be hit by losses across their portfolios in the "likely" event central banks move towards fiscal quantitative easing, according to managers of the Man DNA multi-asset fund Ben Funnell and Teun Draaisma.
Also known as "helicopter money", fiscal quantitative easing (QE) - as opposed to the form practiced by global central banks in the years since the Global Financial Crisis - puts money in the hands of the population in efforts to increase consumer spending, particularly in the case of low interest rates and weak growth.
According to the managers, the approach - which they believe is "highly likely" to be employed in the US, UK and Europe in the next two years - would have an inflationary effect eradicating the negative correlation between equities and bonds that multi-asset funds rely on for returns.
Funnell said: "We have dipped into a more deflationary world. In the next couple of years when central banks bring in fiscal QE, it will be a game changer because it will create inflation [in which case both bonds and equities will underperform].
"Concerted fiscal QE around the world is the biggest danger to global asset prices and is likely to happen."
Draaisma added multi-asset funds "have had an amazing four decades", but with fiscal QE impending and "close to record prices for traditional assets… the likelihood is that returns will be below normal".
He explained that "in past decades", multi-asset funds enjoyed returns in any environment because of the negative correlation between bonds and equities.
However, Draaisma said: "When inflation returns, traditional multi-asset funds allocating only to equities and bonds will really be in trouble."
As a result the pair, who worked together for a number of years at Morgan Stanley, launched the DNA fund at the end of 2018, with 40% exposure to alternative risk premia as well as the ability to make use of options strategies.
Draaisma explained the alternative risk premia strategies, which can be as much as 50%, come via allocations to Man Group systematic, long-short vehicles investing across equities and futures, and offer a "historical correlation [to bonds and equities] of close to zero".
Funnell said options are used for "active tail risk hedging" via a specialist team using a "collar strategy", capping equity gains at 10% in exchange for losses limited to 11%.