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Have multi-asset funds taking on more risk given you higher returns?

24 May 2018

FE Trustnet looks at the IA Mixed Investment and IA Flexible Investment sectors to see if investors have been rewarded for buying higher-risk strategies.

By Jonathan Jones,

Senior reporter, FE Trustnet

Greater equity exposure seems to have been an advantage for top-performing multi-asset funds over the past five years as those that have taken on more risk have generated higher returns.

While investors in UK equity funds don’t appear to have been rewarded for taking on extra risk, as FE Trustnet found last week, in the multi-asset sectors that pattern is reversed.

Indeed, when looking at a headline sector level, the sectors line up as you would expect on a traditional risk-return basis.

The IA Flexible Investments sector – which permits up to 100 per cent allocation to equities – has made the highest returns with more volatility, with the three IA Mixed Investment sectors (40-85% Shares, 20-60% Shares and 0-35% Shares) all following in descending order, as the below chart shows.

Performance of sectors over 5yrs to end of April 2018

 

Source: FE Analytics

Gavin Haynes, managing director at Whitechurch Securities, said: “It has definitely been a period where risk has been rewarded and there is a very high correlation between the amount of equity content and performance.”

Over the last half-decade equities have vastly outperformed bonds, with the MSCI AC World index returning 72.24 per cent versus the Bloomberg Barclays Global Aggregate’s 18.11 per cent.

“Although equity and bond markets had been performing strongly in tandem they have decoupled since 2017 as concerns of rising interest rates have spooked bond markets,” Haynes said.

Meanwhile, equities have continued to perform well in an environment of synchronised global growth.

Additionally, alternative strategies have also struggled to compete with a climate of low volatility, rising equity markets.

“The numbers highlight how important it is to be cautious of relying on past performance at the current stage of the cycle as top performers will be those funds that have taken on the most risk – but this doesn’t necessarily make them the best funds or the most suitable for cautious or balanced investors,” he added.

Below, FE Trustnet breaks down the sectors in more detail, looking at some of the best high and low volatility strategies. We have looked at the three sectors with around 150 funds in, discounting the IA Mixed Investment 0-35% Shares sector as it has a third of the number of constituents.


The first thing to note is that in each of the remaining sectors just four funds out of the 30 with the lowest volatility have produced top quartile returns relative to their peers.

In the IA Flexible Investment sector, five FE Crown-rated funds LF Miton Worldwide Opportunities and Unicorn Mastertrust have achieved low volatility, high returns.

The Miton fund, run by Nick Greenwood, invests in open- and closed-ended funds while FE Alpha Manager Peter Walls’ Unicorn fund, as the name suggests, is made up of investment trusts.

Performance of funds vs sector over 5yrs

 

Source: FE Analytics

Four FE Crown-rated funds F&C MM Navigator Select and VT Thistledown Income have also achieved higher returns with lower volatility.

The F&C fund, run by the multi-manager team at BMO Global Asset Management also invests in closed- and open-ended funds while Dominic Fisher’s Thistledown fund uses a combination of passives, funds and direct securities.

Meanwhile, 39 per cent of the funds in the bottom quartile for volatility – and therefore experiencing the highest levels – have achieved top quartile returns.

The top performing fund in the sector is Neptune Global Alpha, which is managed by Robin Geffen, who, like his equity portfolios, has a high weighting to US technology and emerging market stocks.

The fund invests primarily in direct securities but also owns the Neptune India and Latin America funds in the portfolio. It is 94.9 per cent weighted to equities with just 1.4 per cent held in alternatives, 1.1 per cent in private equity and 2.6 per cent in cash – there is no dedicated fixed income exposure.

Unsurprisingly, with large risk-on trades mentioned above, the fund is also the most volatile in the sector experiencing 13.38 per cent volatility over the past five years.

The second-most volatile fund – and another top quartile performer – is LF Ruffer Japanese, which as the name suggests primarily invests in Japanese equities.


In the IA Mixed Investment 40-85% Shares sector, again just 13 per cent of the least volatile funds have produced top quartile returns.

Five FE Crown-rated MI Hawksmoor Distribution, managed by Daniel Lockyer and FE Alpha Manager Richard Scott since 2012 with Ben Conway added in 2014, has been the least volatile in the highest equity bracketed sector.

The fund is another that invests in a range of open- and closed-ended strategies. Currently it is 45.7 per cent invested in equities.

It has returned 47.13 per cent over the last five years while experiencing volatility of 5.76 per cent.

Performance of funds vs sector over 5yrs

 

Source: FE Analytics

The best performing fund in the top quartile for volatility is the five crown-rated Premier Multi-Asset Growth & Income portfolio run by the firm’s multi-asset team.

The fund-of-funds portfolio has returned 60.01 per cent – the fifth-best in the sector – while experiencing volatility of 6.56 per cent.

It is currently 57.1 per cent invested in equities funds, with 11.8 per cent in bond funds and 11.4 per cent weighted to alternative strategies.

Courtiers Total Return Balanced Risk, and OM Cirilium Moderate Portfolio have round out the four that have achieved the feat of top quartile returns with low volatility.

Conversely, some 45 per cent of the funds in the bottom quartile for volatility have achieved top quartile returns.

Thirteen of the 29 funds have achieved the feat, with the best performing portfolio in the sector, Royal London Sustainable World Trust, among them.

The five FE-Crown rated fund is managed by FE Alpha Manager Mike Fox and invests 33.2 per cent in US equities, 26.1 per cent in UK equities, 22.5 per cent in European equities, 14.6 per cent in UK fixed income and 1.9 per cent in Asia Pacific equities. The remainder is held in cash.

It invests in direct securities rather than funds with technology giants Amazon and Microsoft its top two holdings.

The fund has been the third-most volatile in the sector, with Sarasin IE GlobalSar Dynamic (another top quartile performer) second-most volatile and Neptune Balanced (second quartile returns) the most.


Last up is the IA Mixed Investment 20-60% Shares sector, which again has just four funds in the top quartile for volatility and returns.

There are again some familiar names on the list, with MI Hawksmoor Vanbrugh and Premier Multi-Asset Monthly IncomePremier Liberation IV and F&C MM Navigator Moderate making up the four.

The strategies are run in the same way at the higher-risk category funds in the above two sectors but take a more cautious view with lower equities exposure.

At the other end of the table however, some 48 per cent of the most volatile funds are top quartile performers, the most of any sector studied.

Four crown-rated Sarasin IE GlobalSar Strategic has been the most volatile fund in the sector with 8.66 per cent volatility but has returned 37.95 per cent to investors over the period.

Similarly, FP New Horizon Balanced Income & Growth – the second-most volatile – has also returned top quartile performance of 37.37 per cent.

Performance of funds vs sector over 5yrs

 

Source: FE Analytics

Royal London Sustainable Diversified Trust is the second-best performer in the sector and tops the list of those funds with the highest volatility having returned 51.02 per cent over the last five years.

The five FE Crown-rated fund (again run by FE Alpha Manager Mike Fox) has some 38.8 per cent invested in UK fixed income and 29.9 per cent in UK stocks. It has experienced volatility of 6.66 per cent over the last five years.

Fellow five crown-rated fund Invesco Perpetual European High Income is the next-best performer in the sector with returns of 48.15 per cent.

The fund is reasonably evenly split, with 45.77 per cent in fixed income and 44.28 per cent in equities and 9.95 per cent in cash.

Managers Paul Causer, Paul Read and Stephanie Butcher invest primarily in European government and corporate fixed interest and other debt securities as well as shares of European companies including the UK.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.