Multi-assetJun 8 2015

Fund Review: SLI Dynamic Distribution

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Mr McLeod explains: “The fund aims to provide long-term growth from a combination of income and capital growth by investing in a range of collective investment schemes managed or operated within the Standard Life Investments (SLI) group.” In this way, the fund can get exposure to a range of assets, including equities, bonds, property and money market instruments.

The fund sits in the Investment Association Mixed Investment 20-60% Shares sector. But as Mr McLeod points out: “Absolute return differentiates the Dynamic Distribution fund from the majority of funds in the sector with its holding in the SLI Global Absolute Return Strategies fund and our Absolute Return Global Bond Strategies, which have both generated positive returns while helping to reduce overall volatility.”

He describes the fund as “relatively concentrated”, with only 16 holdings in SLI funds, and says SLI’s “focus on change” philosophy allows him to exploit opportunities across the market. He continues: “The fund takes macroeconomic factors into consideration in that it invests across all the major asset classes, which should provide some level of protection if markets take a dip. We have observed a steady stream of fairly unique market events in recent years. Throughout this, the fund has continued to provide positive returns to investors, which can largely be attributed to the fact that the fund is not tied to a static weighting between the main asset classes.

“As a result we are able to increase or reduce our asset class holdings to exploit expectations of market growth and effectively manage risk levels for our investors.”

The manager notes there have been strong positive cash flows into the fund recently but confirms this has not significantly altered the overall asset allocation of the portfolio.

The fund is overweight UK equities and property relative to its sector at the moment, “as we feel that these asset classes are where we see the most opportunity”, Mr McLeod adds.

According to the fund’s key investor information document, it is at level four on a risk-reward scale of one to seven, with ongoing charges on the retail platform 1 accumulation clean share class at 0.82 per cent.

The managers’ approach to investing has paid off, with the fund outperforming its sector over one, three and five years, FE Analytics shows. In the five years to May 27, the fund returned 70.30 per cent, compared with the sector average of 37.40 per cent, placing it in the top quartile.

Mr McLeod notes: “Primarily, the fund has benefited from its bias to UK equity portfolios, which make up around 50 per cent of the fund.” But he also points to the strong performance of other SLI funds in the portfolio. The manager cites the fund’s largest holding, the UK Equity High Income fund, which he says has outperformed its peer group over the past year.

“Additionally, both the Corporate Bond fund and the Higher Income fund, which are significant holdings, have outperformed their sectors over the past 12 months,” he says. “The biggest detractor from performance was an overweight position in shorter-duration fixed interest assets. The bond rally in the second half of 2014 meant shorter-duration holdings underperformed.”

Mr McLeod believes that while equity markets have made a “strong start” to 2015, risks abound, highlighting geopolitical tensions and the pronounced slowdown in China. But he asserts: “Nonetheless, the medium-term outlook remains one where the global economic recovery can continue. Central bank policy remains supportive, inflation is contained and traditional imbalances, such as current account or credit growth issues, are relatively low.

“With around 50 per cent of the fund invested in equities, if sentiment continues to improve, performance should be strong over the coming months.”

Within fixed income, he is less positive on government bonds “on valuation grounds” and favours European bonds. He adds that “with improving economic drivers and a constrained pipeline of future new developments, real estate remains attractive”.

EXPERT VIEW

Juliet Schooling Latter, director of research, Chelsea Financial Services

This fund invests in roughly 16 SLI funds, including the Elite-rated UK Equity Income Unconstrained and UK Equity Unconstrained, as well as Global Absolute Return Strategies, the latter of which is on our Chelsea Core Selection. So, as you can imagine, it’s a fettered fund of funds that we rate quite highly. It’s got a decent yield of 3 per cent and has performed well over most periods (although it had a blip in the middle of 2011). So it’s achieving its objective of income and growth.