Zenith's Multi-asset sector review found that fund managers are forecasting lower portfolio returns, higher volatility and a "magnified" potential for capital losses.
The pessimistic attitude towards future returns was broadly attributable to accommodative monetary policy and the "profound impact" it has had on asset classes.
"Faced with this ‘lower for longer’ cash rate environment, many sector participants have reduced their long-term cash rate forecasts; supporting such actions on expectations of below trend growth, the absence of inflation, and dovish central bank rhetoric," said Zenith.
The reduced asset class return expectations have made the process of portfolio optimisation more difficult for managers in the sector, said the report.
"For those managers subject to a strategic asset allocation, several have stated that in the absence of wider asset allocation bands or the relaxation of risk limits, they cannot deliver upon targeted outcomes," said Zenith.
As a result, there is an increased willingness upon the part of managers to include alpha (ie, active return) to their asset class return forecasts, said the research house.
"Such an approach has merit as it provides further support for those managers seeking to retain overweight positions in asset classes that would otherwise appear less attractive," said Zenith.
However, this approach is not without its shortcomings, noted the report. First, alpha is variable, which could magnify underperfomance among managers who are assuming alpha is consistent; and second, the correlation of asset class alphas could reduce the durability of portfolios.
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