Professional investors have turned their attention to multi-asset and volatility managed funds while shunning fixed income and UK equities amid the turbulent start to 2018, research by FE Trustnet suggests. 
Recent years have seen stock markets across the globe reach record highs and volatility drop to historically low levels but this environment was shaken up during the first quarter of 2018. Markets were hit by a steep sell-off in February after strong economic data boosted the likelihood of faster interest rate rises while the past week or so has seen stocks struggle with the risk of a trade war breaking out between the US and China.
Against this backdrop, the financial advisers, discretionary fund managers and other professional investors using FE Analytics appear to have increased the amount of research that they are carrying out on funds that offer exposure to a range of asset classes.
At the same time, they are spending less time looking at corporate bond funds – which is not surprising given that inflation and interest rates are expected to rise – and the UK equities, which have underperforming on the back of the uncertainty created by the move to leave the EU.
Source: FE Analytics Market Intel Tool
The chart about shows the change in the share of research that each of the mainstream Investment Association sectors (peer groups such as IA Unclassified, IA Protected and IA Money Market were excluded) witnessed over the opening three months of 2018. To arrive at these figures, we compared the sectors’ share of total research on FE Analytics in 2018 so far with the average for the eight years spanning 2010 to 2017.
The three sectors that have seen the biggest uptick in research are all multi-asset peer groups and IA Volatility Managed funds are out in top. Since the start of 2018, these funds accounted for 4 per cent of the research undertaken by the professional investors using FE Analytics – up from an average of 2.6 per cent over the previous eight years.
Of course, some of this shift is down to the fact that many of the funds in the sector are relatively new entrants to the industry and professional investors had fewer options to research for much of the earlier period we looked at. However, there has still been a jump in their research share since 2017, when the sector was responsible for 3.6 per cent of FE Analytics research.
The most popular member of the IA Volatility Managed sector over 2018 to date has been the £3.5bn Standard Life Investments MyFolio Managed III fund, which is run by Standard Life Investments head of fund of funds management Bambos Hambi.
This is a fettered fund of funds product that chooses its holdings from products managed by Standard Life Aberdeen, aiming for long-term capital and income growth with a volatility range of 9 to 12 per cent a year. Top holdings include Standard Life Investments’ Global Absolute Return Strategies, UK Real Estate and Global Corporate Bond funds.
Square Mile Investment Consulting & Research, which gives the fund a ‘Recommended’ rating, said: “The structure of the fund, whereby it will invest predominantly in Standard Life funds, could mean that at times the manager may lack the flexibility to diversify across investment styles meaning the portfolio could have a bias to a smaller number of themes and ideas than if he were able to select funds from the whole of the market.
“On the other hand the lower costs associated with this approach should be less of a drag on returns than investing outside of the group. Over the longer term and given the breadth of talent and range of strategies from within the group which the team has to select from we believe the fund can deliver an outcome for clients which should meet their expectations.”
Performance of fund vs sector since launch
Source: FE Analytics
Hambi has another 11 funds among the 20 most popular from the IA Volatility Managed sector. Other portfolios heavily researched by professional investors at the start of 2018 include L&G Multi-Index 6, Rathbone Total Return, Aviva Investors Multi Asset III, SVS Cornelian Managed Growth and Architas MA Passive Moderate.
Funds in the IA Mixed Investment 40-85% Shares and IA Flexible Investment sectors have also benefited from large upticks in research from professional investors over the past three months, compared with historic averages. It is interesting that these are the two most equity-heavy multi-asset peer groups, suggesting investors are looking broaden their clients’ exposure across asset classes but remain in ‘risk-on’ mode.
On FE Analytics, the most heavily researched member of the IA Mixed Investment 40-85% Shares sector in 2018 to date has been Vanguard LifeStrategy 60% Equity. This is part of the passive giant’s five-strong LifeStrategy range, which are ready-made portfolios offering a different blend of shares and bonds made up of Vanguard index funds and ETFs.
The range has proven very popular with financial advisers since its launch in 2011, down to its low fees – Vanguard LifeStrategy 60% Equity has ongoing charges of 0.22 per cent – and decent performance – the fund is second-quartile over five years with a 41.99 per cent total return.
An active fund is the second most-researched fund in the peer group: Premier Multi-Asset Growth & Income, a fund of funds offering managed by David Hambidge, Ian Rees, Simon Evan-Cook and David Thornton.
Square Mile, which has awarded the fund an ‘A’ rating, said: “The team has a long-established investment approach and this has been implemented consistently for a number of years. The valuation aware focus aims to ensure they are always seeking to invest into what they perceive is a discount to the current market value.”
The £794.8m fund is currently top-decile in the IA Mixed Investment 40-85% Shares sector over three, five and 10 years. Its largest holdings include Schroder Income, Polar Capital Global Insurance and Charlemagne Emerging Market Dividend.
Other heavily researched funds from this peer group include the likes of Jupiter Merlin Balanced Portfolio, Baillie Gifford Managed and Royal London Sustainable World Trust.
Performance of fund vs sector over 10yrs
Source: FE Analytics
Turning to the IA Flexible Investment sector and FE Alpha Manager Sebastian Lyon’s Troy Trojan fund has been the most researched fund of 2018’s first quarter.
The £4.4bn fund is one of the more cautious members of the peer group, prioritising capital preservation and reflecting Lyon’s belief that the ultra-loose monetary policy of the post-crisis period has distorted markets. The manager builds his portfolio around ‘four pillars’ of blue-chip equities, index-linked bonds, gold and cash.
Jupiter Merlin Growth Portfolio, 7IM AAP Adventurous and Premier Multi-Asset Global Growth have also received high levels of research over the past three months.