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Performance in different market conditions

This article is part of
Guide to Mixed Investments and Balanced Managed

As you might expect from a middle ground sector, James Dalby, market intelligence manager of Aviva UK Life, says typically performance of Balanced Managed funds sits equally between that delivered by low and high risk funds.

So in a strongly rising equity market, Mr Dalby says Balanced Managed funds will tend to lag pure equity funds. But equally, Mr Dalby says when equity markets fall Balanced Managed funds will tend to fall less.

Marcus Brookes, head of multi-manager at Schroders, adds the performance of Mixed Investment 40 per cent to 85 per cent funds can vary significantly according to the approach taken by managers.

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Put simply: in a bull market for equities a fund with 80 per cent exposure to equity markets will perform better than one with 50 per cent exposure. But on the other hand, Mr Brookes says if equity markets fall then the fund with lower equity exposure will provide greater downside protection.

In truth, performance data suggest those funds that have a higher equity exposure compared with a more diversified asset mix have outperformed their peers over the longer term.

Data from FE Analytics show that as of 10 February 2014 the top three best performing funds over 10 years had an equity allocation of between 75 per cent and 82 per cent, while the best performing fund over three and five years (its also top three over one year) is edging towards the very top of the sector’s equity allocation boundaries.

Adrian Lowcock, senior investment manager for Bristol-based Hargreaves Lansdown, says all Balanced Managed funds should ensure strong and smooth performance, but underperform strongly rising equity markets and provide enough diversifcation to protect investors from the full effects of any falls.

He says: “These sort of products should smooth performance, however getting the asset allocation proportions wrong could result in significant long-term under performance.”

Richard Peirson, manager of the Axa Framlington Managed Balanced fund, says fund performance in this sector is likely to reflect that fund’s asset allocation and the manager’s success in managing those assets.

Mr Peirson says: “When equity markets are weak such funds are also likely to be weak in absolute terms but are likely to outperform pure equity funds.

“Conversely they are likely to lag the performance of pure equity funds when markets are strong but should still generate strong absolute returns. Recently economic data has been good, supporting most economic forecasts of stronger growth in 2014.

“Because we believe that returns from equities are likely to be attractive over the medium to longer term we are more likely to reflect periods of weak economic growth, and probably weak equity markets, in a defensive approach to equity investment rather than by increasing the bonds and cash element of the portfolio significantly.”

Because of the diversity of the fund components, Alistair Campbell, head of investment marketing at Skandia, says different elements may outperform others in varying conditions.

For example, Mr Campbell says equities in a bull market will in general deliver better returns than debt, but this may well reverse as market conditions change.