Troy Trojan is one of only two multi-asset funds in the Investment Association universe that have achieved a positive return year-to-date, according to data from FE Analytics.
Since the start of the year, equity markets have been highly volatile due to fears surrounding China’s growth slowdown, the collapse in commodity prices and uncertainty regarding the Fed’s next move. To date, the FTSE 100 index has lost 8.37 per cent while the MSCI AC World has lost 8.7 per cent.
Performance of indices in 2016
Source: FE Analytics
While equities have dropped in value though, one of the benefits of buying into a multi-asset fund is that the manager is able to diversify across asset classes so if one is underperforming, this can be counteracted by the outperformance of another.
As such, investors may be surprised that only two multi-asset funds have provided a positive return in 2016 while only one – BlackRock NURS II Consensus 35 – is flat.
“I am a little disappointed so many mixed asset funds have not performed better over this time, which I suspect is down to more funds being driven by benchmarks rather than operating a more flexible approach,” Neil Jones, investment manager at Hargreave Hale, said.
“Saying that, it does also demonstrate quite how difficult markets have been over recent times, as many asset classes have struggled and appear to be increasingly correlated, so we have seen fewer hiding places in the turbulence.”
AXA Wealth’s Adrian Lowcock, however, is unsurprised at the underperformance of multi-asset funds and says the reason for the sell-off keeps changing, which suggests markets are being irrational. He agrees that this makes for challenging conditions across all asset classes.
“Sentiment has been the major driver of markets in the short term and when confidence evaporates it is easy for the market to come to the wrong conclusions,” he said.
“This environment makes it very difficult for investors to get right in the short term. They look to invest rationally, this is not profitable if markets are not rational.”
Hargreaves Lansdown’s Laith Khalaf says these results are largely to be expected because, even if multi-asset funds are able to diversify away from equities, they still hold them as part of their portfolios and markets have suffered particularly poorly over the last six-to-nine months.
“It doesn’t come as a surprise that those funds have fallen in value – they’re not absolute return funds so they’re not looking to make money in all market conditions, they’re looking to temper the volatility of the stock market,” he pointed out.
“Let’s say you have 50 per cent invested in the stock market and the stock market falls 20 per cent, you’re going to feel some pain.”
It has indeed been the multi-asset funds with the largest proportion invested in equities that have struggled the most in 2016.
The multi-asset sector that has delivered the smallest loss on average has been IA Mixed Investment 0%-35% Shares with a 2.76 per cent loss, followed by Mixed Investment 20%-60% Shares with a 5.27 per cent loss. While the Mixed Investment 40%-85% Shares has lost 7.71 per cent, the IA Flexible sector has been hit the hardest with a negative return of 8.33 per cent.
Performance of indices in 2016
Source: FE Analytics
This also rings true with the four crown-rated Vanguard LifeStrategy 20% Equity fund, which was the second fund to achieve a positive performance year-to-date. Since 2016, it has outperformed its average peer by 2.89 per cent with a total return of 0.13 per cent.
The fund invests in a range of Vanguard index trackers, 80 per cent of which are in fixed income. Its largest holdings are in the Vanguard Global Bond Index fund at 19.3 per cent, the Vanguard FTSE Developed World ex UK Equity Index fund at 13.6 per cent and the Vanguard UK Government Bond index at 13.1 per cent.
The £285m fund has also outperformed its peers over longer time frames and is in the top decile over one and three years as well as over one, three and six months.
“Vanguard LifeStrategy 20% is mainly invested in the fixed interest area, so it should be a little less volatile than an equity fund,” Jones said.
“For now, this area should be okay, as the prospects of interest rates rising and inflation appear ever further away, and both are factors likely to hurt the sector.”
“This Vanguard fund does have the potential growth kicker of being able to invest 20 per cent in equities, but ultimately it should be considered as part of the fixed interest content of an investor’s portfolio.”
Lowcock agrees and says that while its low exposure to equities has naturally given it a more defensive position compared to many multi-asset funds, investors should keep a close eye on the holding if market sentiment becomes positive.
“Whilst the remainder of the fund, 80 per cent, is invested largely in government bonds which have proven to be a safe haven as concerns over deflation and negative interest rates have sent the yields falling. The fund could well suffer if markets rebound and inflation outlook changes,” he warned.
Vanguard LifeStrategy 20% Equity has a clean ongoing charges figure (OCF) of 0.24 per cent and yields 1.3 per cent.
In contrast, FE Alpha Manager Sebastian Lyon’s £2.6bn Troy Trojan fund sits in the IA Flexible Investment sector and has provided a total return of 0.81 per cent year-to-date.
Performance of fund vs sector and benchmark in 2016
Source: FE Analytics
The famously defensive fund has achieved a top-decile total return over 10 years having comfortably doubled its sector average, but it has come under fire for its three-year performance which was bruised by bottom-decile returns in 2012 and 2013.
“You’ve got to be patient and understand what a fund is trying to do,” Khalaf said. “I think a lot of that criticism came when the market was absolutely tearing away and Troy Trojan wasn’t doing very much because it was defensively positioned.”
“That’s exactly what you can expect from this fund – when times are good in the stock market it’s probably going to lag behind and it really comes into its own at times like these when there’s more volatility and its defensive nature means it probably outperforms.”
Lyon’s fund aims to achieve both income and growth over the longer term. It built around ‘four pillars’ of blue-chip equities, index-linked bonds, gold and cash.
He currently holds 41 per cent in equities, 17 per cent in cash, 15 per cent in index-linked securities and 16 per cent in fixed interest. There’s also 10 per cent in gold.
“Troy Trojan has held up well, helped by having a large cash weighting,” Jones said. “Income from this fund is not great, but it should perform relatively well during more difficult times, so for nervous investors who want to retain some stock market exposure, this would be a good fund.”
Lyon adopts a bottom-up stock-picking process and opts for high quality longer term holdings to minimise downside risk.
Over the last decade, it is in the top decile for its annualised volatility, its Sharpe ratio, which indicates risk-adjusted performance, and its maximum drawdown, which measures the most money an investor would have lost if they’d bought and sold at the worst times.
Troy Trojan has a clean OCF of 1.06 per cent and yields 0.47 per cent.
