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Multi-asset: What’s in a name?

By Penny Ning Pan

Exactly 25 years ago a British ad campaign for a wood varnish succeeded beyond the wildest dreams of the manufacturer. 

Ronseal’s “It does exactly what it says on the tin” campaign turned the conventional marketing campaign wisdom upside down. Instead of promising extraordinary outcomes, the ads’ mundane promise was: this is what you want, so this is what you get. It junked the jargon and left consumers clear about what they were buying.

Sales rocketed, the campaign slogan became one of the most recalled in history, and “it does exactly what is says on the tin” entered the British English vernacular when describing a person, product or process that delivers. It’s even been adopted by political leaders in much the same way ad slogans like "Where's the beef?" have been deployed by politicians in the US.

The financial services industry tries to take the same approach, offering products that deliver as the buyer hoped. But one area where there is still some ambiguity is in the terminology used to define risk tolerance levels.

Terms like “conservative,” “balanced” and “aggressive” are commonly used to define different risk tolerance levels in multi-asset investment products or indexes, but without objective data to back up these definitions. 

The risks of this ambiguity are clear: investors may realize too late that an index or product they have selected is far from their own expectation of the level of risk tolerance the name seemed to imply. In investments, as in other spheres of life, what seems “moderate” through one pair of eyes can be “conservative” in another’s. 

And a related unanswered question is, what are the “market average” asset allocation levels for a conservative or a moderate fund, assuming such an objective definition does exist?

In order to bring some rigor to the process, FTSE Russell takes a volatility-based definition, which we believe cuts through the noise and focuses on what the indexes measure. 

In our approach, we captured all US asset allocation mutual funds from the Morningstar fund database.

We then ranked each fund by 3-year volatility, from most volatile to least volatile. Funds were assigned to one of five volatility quintiles, the least volatile in the conservative quintile and the most volatile in the aggressive quintile: 

  • Conservative
  • Moderately Conservative
  • Moderate
  • Moderately Aggressive
  • Aggressive


For each quintile, the average asset allocation levels of all funds are calculated. The results are market based allocation levels, based on an objective definition of risk tolerance.

FTSE Russell then applies these five sets of average allocation weights to indexes that represent the performance of different asset classes to create the composite multi-asset FTSE US Market Based Allocation Indexesfive indexes ranging from Conservative to Aggressive.

 

The historic analysis below suggests this approach works for the basket of funds we analyzed, as we saw a clear distribution of average volatilities of cohorts from 2006-2018. So, based on the basket of products we reviewed, investors would have a clearer, objective idea on what “aggressive,” “conservative” or "balanced" means in practice.

The objective definitions and market-based approach means that the FTSE US Market Based Allocation Indexes can offer useful information, but also be performance benchmarks for US wealth managers and financial advisors. So that, for investors, there will be less ambiguity, and multi-asset strategies are more likely to deliver what it says on the tin.

 

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