Multi-assetFeb 16 2014

How balanced allocations are evolving

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It has been just over two years since the IMA introduced the mixed investment sectors in place of their ‘managed’ predecessors - cautious, balanced and active - in an effort to “improve clarity for users” by removing any implied risk association.

As of 1 January 2012 the old balanced managed sector transformed into the IMA Mixed Investment 40-85% Shares sector. As the name suggests, there is a prescribed minimum and maximum equity allocation for funds in this revised sector, but no set requirement for fixed income or cash.

Domestic equity dominance

While funds can take a variety of approaches within this equity constraint, performance data suggest those funds that have a higher equity exposure compared with a more diversified asset mix have outperformed their peers.

Data from FE Analytics show that as of 10 February 2014 the best performing fund over 10 years is the £301.4m CF Ruffer European fund, which generated a return of 287.15 per cent and had 81 per cent of its portfolio in equities. Meanwhile the second and third best funds – the McInroy and Wood Balanced fund and the Consistent Practical Investment fund – had 75 per cent and 82 per cent respectively in equities.

In addition the Consistent Practical Investment fund, which is edging towards the limit of its equity exposure, has been in the top three of the sector over one, three and five year periods - and topped the table over both three and five years with returns of 47.58 per cent and 111.28 per cent respectively.

Peter Fitzgerald, head of multi-asset at Aviva Investors, notes that this trend for funds in the sector is the very reason the firm’s risk targeted funds do not sit within, as they take a global unconstrained approach.

He adds: “It’s not so much the amount of money invested in equities in those [mixed investment] peer groups, but the composition of the equities and the home bias that is prevalent in a lot of those.

“So for example a typical allocation would be somewhere around 75 per cent equities and typically about half of that would be in UK equities. If you take an index like the MSCI World then the UK would be approximately 10 per cent. So for us the peer group in the balanced managed funds have a very high weighting to domestic UK equities and domestic bonds.

“It is always quite difficult to get detailed and accurate info on the composition of these peer groups. Our belief is there is a very limited use of alternative asset classes within these portfolios.”

Richard Peirson, who has managed the £575.7m AXA Framlington Managed Balanced fund for almost 20 years and which is top quartile in the sector across one, three, five and 10 years, notes the asset allocation has not really changed significantly in that time.

“The premise that I follow is to take a view that we are good at stock selection, particularly good in equities. We add a bit of value in bonds but it is outperformance in equities that we expect to achieve and so we see no reason to be overly aggressive on the asset allocation front.”

He adds: “It is very tempting to move the asset allocation around too frequently which tends to be a bit of a zero sum game. Some decisions work, some decisions don’t and it tends not to add very much.

“There are some good fund managers here and we’ll be pretty close to the peer group most of the time. Where we have a strong view we’ll back it with a sensible amount, but most of the time I’m very comfortable being very close to the peer group and I’m not at all embarrassed by that.”

Changing times

In contrast David Hambidge, director of multi-assets at Premier and co-manager of the Premier Multi-Asset Income and Growth fund, suggests the portfolio is a “more modern balanced managed fund”.

He explains: “The old style balanced managed fund really was just equities and bonds with very much equities dominating the asset allocation in years gone by. That is slowly changing, with less emphasis on equity and more emphasis on other assets.

“You still get a UK bias but there is more overseas content in this type of sector than in the old balanced managed sector.”

In the Premier Multi-Asset Income and growth the manager notes there are roughly five ‘buckets’ or asset classes that the fund can and does invest in – equities, bonds, commercial property, alternatives and cash. The alternatives ‘bucket’ comprises of anything from infrastructure to re-insurance to long/short funds.

Recently he notes the fund, which is top quartile over one and three years with returns of 11.59 per cent and 26.11 per cent respectively, had a slightly lower equity content than the rest of the peer group. But he suggests the drivers of performance in 2013 were also related to what funds didn’t own.

“We had just under 70 per cent equities for most of last year, we were being cautiously optimistic. We’ve probably got les s in equities than most of our peers, but then last year we didn’t own any gold or natural resources, so avoiding that was good. We also didn’t have any emerging market debt, which suffered in the second half of the year and didn’t fit into our process at all. We were also underweight fixed income generally which was a positive and not having any developed market government bonds in our portfolios helped.”

“Performance was not necessarily down to owning a lot of equity it was more about avoiding some of the banana skins that occurred last year rather than being stuffed full of equity and enjoying the ride,” he adds.

Mr Peirson notes that for most of his tenure the average weighting has been 80 per cent in equities and 20 per cent in bonds and cash, which he treats more as an ‘insurance policy’ or buffer in cases of extreme events.

“If we are in an environment where we are cautious, we’d rather run the equity part of the portfolio more conservatively rather than try to be clever and overweight bonds or cash.”

He does note that asset allocation in these types of funds has evolved over time, with certain categories such as alternatives and overseas bonds not really existing 20 years ago.

“We don’t invest in alternatives at all, we are simple souls - conventional, long-only equity managers. We don’t feel that we have the expertise to invest in hedge funds, absolute returns, structured products etc that come within the alternatives assets category.”

Although the name may have changed the sector itself continues to house a number of more traditional balanced managed funds alongside more ‘modern’ incarnations making the most of alternative assets.

This can make it difficult to compare like with like, so digging into the details of what these funds are investing in is essential.