Quants Corner – Global risk appetite: Multi-asset fund flows

Tracking global risk appetite using multi-asset fund flows

Over the last decade, as investment managers have increased their attempts to generate investment products that efficiently diversify, resulting in multi-asset balanced funds on the rise.

Multi-asset funds used to include just equities and bonds from an individual country when they were first introduced. At the time 60%:40% or 70%:30% portfolios were easy to explain to investors, as there were only two types of investments, but nowadays multi-asset funds are more complicated. Today, asset managers can use different geographies and asset classes to build strategies for multi-asset funds. A traditional multi-asset fund manager might easily include high yield corporate bonds as a new asset class to a multi-asset portfolio or add Japanese exposure with a few clicks on a screen. Overall investment strategies have spiraled in complexity and require a control mechanism.

Today, most of the asset managers are required to comply with a predefined budget while investing in different products, to limit their exposure to risky assets. These risk budgets are simply calculated using historical volatilities and investors can choose from a range of multi-asset funds with ‘low to high’ risk budgets attached.

As these investment vehicles are becoming more popular, their importance in tracking the global risk appetite is also increasing. Investors with a higher risk appetite will invest higher amounts in higher volatility targeting funds. As a result, there are higher investments in equities, high yield bonds, and emerging market assets. Investors with a lower risk appetite will invest in lower-risk budgeted funds, resulting in higher investments in short-term bonds and cash-like instruments.

Overall risk appetite of investors can be tracked through state-of-art methodology using EPFR data. Investors can track funds flows from high-risk multi-asset funds vs low-risk multi-asset funds, resulting in invaluable data insights and financial intelligence. In order to generate this analysis, first, we ranked balanced funds in the EPFR database into deciles using their three-year rolling standard deviations. Second, we calculated the cumulative flow (% of AuM) into the top quartile (funds with highest historical volatility) and into the bottom quartile (funds with lower historical volatility), see figure 1.

Figure 1: Difference between the cumulative flow (% of AuM) to funds with highest historical volatility and lowest historical volatility – 4-week rolling sum 

Figure 2: Fund Flows to different Risk Categories in Multi-Asset Funds and Classical Asset-Types


Figure 2 shows flows into low, mid, and high-risk multi-asset funds with the classical asset-types, equities, bonds, and money market funds. From the start of 2012, both low-risk and mid-risk funds tended to receive inflows whereas high-risk funds have received outflows. However, after the end of 2015 mid-risk funds started to receive outflows, and flows into low-risk funds also started to stall. Recently (from the beginning of the last quarter of 2018), low-risk and mid-risk funds started to receive increased outflows relative to their AuMs again. In the same period, money-market and bond funds started to see inflows – representing a significant shift in the global risk appetite.

Rapid changes in the investment atmosphere need tracking. The ability to investigate these changes using state-of-art technologies is crucial and with EPFR fund flows data you can help investors: generate different measures, and incorporate the changing investment universe, habits, and vehicles of investments available to investors.

Did you find this useful? Get our EPFR Insights delivered to your inbox.

Related Posts

Getting ready for an anomalous election

Getting ready for an anomalous election

Although the 2024 US presidential election looks likely to be a re-run of the 2020 contest, it still meets the classic definition – irregular, deviating from the normal – of the word anomalous. From the age of the incumbent to the Republican challenger Donald Trump’s legal baggage and lack of decorum, everything about this election seems unusual.

Better, More Actionable Insights

Let us show you how EPFR can create value for your specific strategy