A new name for Balanced Managed

Out went Cautious, Balanced and Active and in came Mixed Investment 20 to 60% Shares, Mixed Investment 40 to 85% Shares and Flexible Investment (previously known under the old ABI regime as Mixed Investment 60-100% Shares).

The IMA also added the fourth ABI sector for less equity-heavy funds that did not correspond with a management equivalent: Mixed Investment 0-35% Shares.

That group of middle-of-the-road, multi-asset vehicles that came under the Balanced Managed umbrella therefore now live in the 40 to 85% Shares category, defined as before according to their equity weighting but in a sector that no longer implies any risk association.

However, many of the funds that sit within this group are still called Balanced Managed.

As per the other mixed investment sectors with a defined equity quotient, funds in this category must hold between the minimum and maximum equity thresholds, but do not have to adhere to any prescribed proportion of fixed income investments, or any other alternative.

A minimum of 50 per cent of investments must be denominated in developed market currencies (US dollar, sterling and euro), of which 25 per cent must be in sterling.

Richard Peirson, manager of the Axa Framlington Managed Balanced fund, says in addition to global equities Balanced Managed funds may invest in property, bonds, alternative assets or cash, although there may be some sector restrictions.

Alistair Campbell, head of investment marketing at Skandia, says generally these hybrid funds stick to a relatively fixed mix of stocks and bonds that reflects either a moderate (higher equity component) or conservative (higher fixed-income component) orientation.

Marcus Brookes, head of multi-manager at Schroders, says funds in this sector may use a multi-manager fund-of-funds approach, meaning their portfolio would be made up of investments into other single-asset funds rather than direct stocks and bonds.

Mr Brookes adds: “A factor that investors should be mindful of when selecting funds within this sector is that because the funds’ exposure to equities can vary from 40 to 85 per cent, their correlation to the stock market can change significantly.

“If an investor wants high exposure to stocks, then he may be disappointed if the fund manager drastically reduces his equity allocation. What this means is that investors need to monitor these fund’s allocations so they have some idea of what to expect from their performance.”

James Dalby, market intelligence manager of Aviva UK Life, says the name change for the sector was really to remove the subjectivity of these terms as they could imply funds were operating at a certain level of risk.

Mr Dalby says within the Balanced Managed sectors there were a diverse range of risks and the shift to a more objective asset-based descriptor is seen as fairer to customers. He adds the actual definition changes were needed to ensure harmonisation between IMA (Oeic/unit trust funds) and ABI (unit-linked funds).

Mr Campbell says the benefit of Balanced Managed funds is rather than having to select a stock fund and a bond fund you can own one fund which automatically chooses the underlying stock and bond investments for you. It thuis outsources a degree of the decision-making.

However, he warns sometimes a Balanced Managed funds charges may exceed that of choosing individual funds because of the work that goes into selecting and monitoring the underlying investments on an investor’s behalf, or due to having two layers of charges where multi-manager strategies are used.

Also, he points out within the Balanced Managed fund you cannot choose how much is in what type of stocks, such as international, small cap, large cap; or what type of bonds, such as government, corporate or high yields.

Mr Campbell says: “Of course, the whole point of the fund is that someone else is making those choices for you.”

Schroders’ Mr Brookes says investors should now be reassured the IMA sector definitions are now more consistent but warns the revision of the sectors does not mean that extreme performance will not occur again.

Mr Brookes says: “The emphasis remains on undertaking proper due diligence to understand the inherent risk/return profile of the fund.

“There is no substitute for good research when it comes to investing and the IMA can only seek to act as a sign post to aid an investor’s journey.”