Since 2008 investors have become increasingly nervous about the threat of sharp losses to their capital. However, with yields on safe haven bonds at all-time lows and global growth stagnating, they need to look at riskier investments for real returns.
FE Alpha Manager Philip Saunders, who runs the £23.8m Investec Diversified Growth fund, says his portfolio can offer growth to investors without sacrificing downside protection.
Investec changed the direction of what was previously called its Balanced Managed fund because it was effectively running a sterling-hedged version of its dollar programme in the UK market.
"In order to invest globally and to control volatility arising from your exposure outside the base currency, you have to do something about that," he commented.
In 2008, the weakness of sterling exaggerated the blow of the market drawdown.
"If you were a sterling-based investor, it was painful but it was basically offset. If you were a dollar-based investor the dollar went up and so therefore, you had no diversification benefit from the base currency at all. In fact, that was the opposite."
"We concluded we needed to provide a daily priced version of the fund where the total expense ratio (TER) was capped and so it was dealing with the liquidity issue, dealing with the pricing issue and dealing with the need to have a product that was sterling-centric from the ground up," he said.
"From 1 April this year, we renamed the fund and introduced some changes in terms of the investment process to make it more downside risk-aware."
"We’re prepared to manage the downside in a more forthright manner than we did previously, but doing exactly what we’re doing in an institutional context elsewhere."
"In terms of risk management, that’s going to be a bit more proactive," he said.
Saunders adds that other funds in the sector are relying too heavily on equity exposure to drive returns. He says the fund is run on a more diversified return profile, investing in international equities and fixed interest.
The fund is now making greater use of derivatives, adding more diverse holdings to the portfolio and using short positions and Australian dollars to manage risk-off volatility.
The four crown-rated Diversified Growth portfolio has been a top-quartile performer over five years. It has returned 16.84 per cent during this time, more than doubling the 7.49 per cent made by the IMA Mixed Investment 40-85% Shares sector.
However, it has underperformed the UK consumer price index, which has risen 17.28 per cent over the five years.
Performance of fund vs sector and benchmark over 5-yrs
Source: FE Analytics
The fund has a minimum investment of £1,000 and an annual management charge (AMC) of 1.5 per cent. Its total expense ratio (TER) is 1.8 per cent.