How Do You Benchmark a Multi-Asset Fund?

By Morningstar Indexes Research - first released 19 October 2021


Elle Kuhta Product Manager, Indexes AU/NZ Morningstar
Elle Kuhta Product Manager, Indexes AU/NZ

Over the last decade, investor capital has flooded into funds that combine stocks, fixed income, and other asset classes. According to Morningstar data, worldwide assets in multi-asset funds and exchange-traded funds reached USD 4 trillion in 2020, up from roughly USD 1 trillion in 2008.

This trend is echoed locally as Australian multisector funds, which include superannuation funds, lead the way in asset flows quarter on quarter, with net inflows of almost AUD 10 billion during the June quarter of 2021.

Exhibit 1  Flow by Asset Class Second Quarter of 2021 (AUD Billion) Note 1

While multi-asset strategies have many positives, they present a real challenge when it comes to benchmarking. Defining the investable universe in a way that facilitates measurement is a difficult task and multi-asset investment managers respond with a wide range of measures to define the success of their strategies, resulting in confusion for investors.


Exhibit 1 Flow by Asset Class Second Quarter of 2021 AUD Billion

As regulatory pressure grows, investors and managers alike are grappling with the issue of how to choose and evaluate a portfolio that mixes stocks, fixed income, and other assets. Morningstar's new Target Allocation Indexes aim to set a standard and create a clear and consistent measuring stick for multi-asset strategies.

The indexes balance global consistency with local Australian and New Zealand relevance, and are aligned with the existing Morningstar Category Classifications.

The new benchmarks will serve as the category benchmark for Morningstar's Multisector Categories as of November 2021 and will be used in the Morningstar Analyst Rating process.


Investing in Multi-Asset Funds – a Burgeoning Space

The landscape for multi-asset funds is diverse. Their roots can be traced to traditional balanced funds, including the common 70:30 split between stocks and fixed income (or growth and defensive assets), which commonly constitute industry superannuation fund default investment options. Their growth has been further fueled by the burgeoning managed account market in Australia.   

Implementation of multi-asset strategies can vary from baskets of securities to a fund of funds approach. Some use a strategic asset allocation while others are tactical or dynamic. Asset class building blocks can be passive or active, use in-house investment capabilities or external managers, even a combination of all.

Morningstar researchers have created a framework to ensure funds are appropriately assigned to the correct category, regardless of fund name. Just because the risk profile “balanced” is in a fund name does not mean it is a balanced fund. Fund portfolios are examined to determine category assignments. Multisector funds with relatively static asset mixes fall into Morningstar categories defined by their equity allocations. For example, funds that have 41%-60% growth assets are defined as "balanced," while those with 61%-80% are classified "growth." This gives investors a consistent approach to defining risk and allocation preferences.

Multi-asset funds are often described as a “one-stop-shop" as their diversified nature allows investors to outsource portfolio assembly. The default investment options in many superannuation funds are a true “set it and forget it” solution. Some even adjust their asset mix as an investor ages. Morningstar data shows that multi-asset funds generally promote better investor behaviour. According to Morningstar’s research report, "2021 Mind the Gap," multi-asset funds produced the best money-weighted returns (also known as investor returns) of all U.S. fund types, with the narrowest return gaps among categories. This is partly because allocation funds limit volatility, so investors are less tempted by dramatic performance swings to mistime purchases and sales. It is also because allocation funds are often used as core long-term portfolio holdings.

Exhibit 2  The Gap by U.S Category Group (10-Year Returns)

Exhibit 2 Morningstar

Source: Morningstar Direct. Data as of 31/12/2020. Excludes commodities category group. Gap numbers may not match differences in returns because of rounding.

Indexing Multi-Asset Funds – a Unique Challenge

Benchmarking a multi-asset strategy differs substantively from a managed strategy focused on a single-asset class. A traditional index reflects the opportunity set for an investment strategy. The benchmark named in a prospectus or product disclosure statement sets direction and serves as a gauge of value-added (or subtracted). Benchmarking is also critical to understanding risk and return drivers and measuring portfolio characteristics.

The many dimensions of a multi-asset strategy complicate analysis. First, there’s the allocation between stocks, fixed income, and other asset classes. Then, there are the types of stocks (size, style, geography) and fixed income (sector, duration, credit quality, geography). If the strategy uses actively managed underlying funds as opposed to index funds, there is an additional layer of security selection within each asset class sleeve. And for objectives-oriented funds, there’s the outcome to consider.

Multi-asset funds address the benchmarking dilemma in a variety of ways. In some markets, they lack benchmarks altogether, leaving investors in the dark. Others use peer group averages, which are not investable, can reflect heterogeneous groupings, and flatter a fund that is the best of a bad bunch. Still others use a single asset class benchmark or measure themselves against somewhat arbitrary and noninvestable measures, such as inflation plus 4%, or easy-to-beat benchmarks, such as cash rates.

Custom benchmarks are also common. When managers exercise discretion in assembling their own benchmark, it raises questions of independence and appropriateness, not to mention lack of comparability across funds. Stitching together indexes from a range of providers may create inconsistencies when each provider follows a different methodology. It may also introduce licensing issues for asset managers. Maintaining blended benchmarks can also be technically challenging, especially in volatile market conditions or when the fund changes its strategic asset allocation. Complexity is another challenge, as is consistency across strategies. As the government and regulators take increased interest in benchmarking through Your Future, Your Super Performance Tests that took effect from July 1, 2021, super funds and multi-asset strategies are coming under increased scrutiny.

Benchmarking Multi-Asset Funds Through the Morningstar® Target Allocation Index Family

The new Morningstar® Australia & New Zealand Target Allocation Index Family provides investors with tools to benchmark performance of multi-asset funds across five risk tolerances—conservative to aggressive. Aligned with the previously mentioned Morningstar Category Classifications, the indexes are the first allocation benchmarks to follow a consistent construction approach across regions. Utilising the Morningstar database of multisector fund portfolio holding data, the indexes reflect home bias, currency exposure, and local asset class preferences.

Exhibit 3a  Morningstar Australia Target Allocation Index Asset Mixes

Indexes Target Allocation AU NZ 0823212

Exhibit 3b  Morningstar New Zealand Target Allocation Index Asset Mixes

Indexes Target Allocation AU NZ 0823213

Source: Morningstar Indexes. Data as of June 2021.

The indexes take their asset allocation cues from Morningstar’s multisector fund categories. The indexes set equity allocations to the category midpoint. For example, the Morningstar Multisector Balanced Category is defined by 41%-60% growth assets, thus the midpoint for the Balanced Index is 50%. Leveraging Morningstar’s survivorship-bias free database of investment portfolio holdings, Australian and New Zealand category averages drive index weights within the stock, fixed income, and cash sleeves, depicted in Exhibit 3. This aligns the indexes with actual investment behaviour of multi-asset managers. Short-term fluctuations in the asset mix are smoothed out by using a three-year look-back period.

Exhibit 4 Target Allocation Index Construction Process Indexes Target Allocation AU NZ 082321

Meanwhile, Morningstar’s range of single-asset indexes fill the sleeves. These building blocks are pure and nonoverlapping—the most commonly used exposures by professional asset allocators. The methodology is transparent and the resulting benchmarks replicable.

Exhibit 5  Constituent Indexes



Asset Class

Index Name



Australian Equity

Morningstar Australia GR AUD


International Equity (Hedged)

Morningstar Global ex-Australia NR Hedged AUD


International Equity (Unhedged)

Morningstar Global ex-Australia NR AUD


Australian Property

Morningstar Australia REIT GR AUD


International Property

Morningstar Global ex-Australia REIT NR Hedged AUD


Domestic Fixed Income

Morningstar Australia Core Bond GR AUD


International Fixed Income

Morningstar Global ex-Australia Core Bond GR Hedged AUD



Morningstar Australia Cash GR AUD


New Zealand

Australia and New Zealand Equity

Morningstar Australia New Zealand 50/50 GR NZD


International Equity

Morningstar Global ex-Australia NR NZD


New Zealand Real Estate

Morningstar New Zealand Real Estate GR NZD


International Property

Morningstar Global ex-Australia REIT NR Hedged NZD


New Zealand Fixed Income

Morningstar New Zealand Treasury Bond GR NZD


International Fixed Income

Morningstar Global Core Bond GR Hedged NZD



Morningstar New Zealand Cash GR NZD


Source: Morningstar Indexes. Data as of 30/06/2021.

Benchmarking multi-asset strategies is critical, and the current tools available to investors lack consistency. As multi-asset funds become more prominent across the globe, and regulatory pressure, such as Your Future Your Super, grows on these funds, multi-asset indexing must evolve. Morningstar’s Target Allocation Index Family aims to empower multi-asset investor success by providing a clear, convenient, and consistent measuring stick.


Elle Kuhta  Product Manager, Indexes AU/NZ
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Dan Lefkovitz Strategist, Morningstar Indexes
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Chris Tate Manager Research Analyst
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Morningstar Indexes combine the science and art of indexing to give investors a clearer view into the world’s financial markets. Our indexes are based on transparent, rules-based methodologies that are thoroughly back-tested and supported by original research. Covering all major asset classes, our indexes originate from the Morningstar Investment Research Ecosystem—our network of accomplished analysts and researchers working to interpret and improve the investment landscape. Clients such as exchange-traded fund providers and other asset management firms work with our team of experts to create distinct, investor-focused products based on our indexes. Morningstar Indexes also serve as a precise benchmarking resource.

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