Unlike single asset-class funds that are forced to hold 80 per cent of their assets in their chosen area, multi-asset managers have more flexibility to chop and change their exposure to equities, bonds, property and so on.
This has allowed funds to ride out times of volatility in safer areas such as bonds and cash, and increase their equity weightings when the macro outlook is rosier.
Here is a selection of funds that have excelled in both rising and falling markets in recent years.
IMA Flexible Investment
Funds in the IMA Flexible Investment sector have the most flexibility when it comes to flitting between asset classes. They can hold up to 100 per cent in equities, or as low as 0 per cent, meaning they can shut up shop if a manager sees a mass correction on the horizon.
One of the standout funds from a risk-adjusted return perspective is the CF Ruffer Equity & General fund, managed by FE Alpha Manager Alex Grispos.
The £221m fund has an unusual process, raising its cash exposure as markets and valuations rise. This has seen it protect very effectively during market corrections – such as 2008 and 2011 – and the manager’s willingness to buy back into cheaper stocks after a market fall has seen it perform well in rising markets as well.
For example, in the lead up to the financial crisis Grispos’ equity exposure was as low as 30 per cent, and then rose to 95 per cent in the second quarter of 2009.
CF Ruffer Equity & General was the best performer in 2008 with gains of 7.33 per cent. This compares to a loss of more than 26 per cent from the IMA Flexible Investment sector average. It also vastly outperformed in the down year of 2011.
Source: FE Analytics
While falling short of the sector in the up years of 2009, 2010 and 2012 the fund still made competitive returns, and actually outperformed last year with returns of 21.44 per cent.
On a cumulative basis the fund also excels, with top quartile performance over a one, three and 10 year period, and second quartile performance over five. It’s also consistently been one of the least volatile funds in its sector, reflected in the risk/return chart below.
Risk/return of IMA Flexible Investment funds over 10yrs
Source: FE Analytics
The FE Research team rates the fund very highly, highlighting it as a good option for investors looking to diversify their portfolio.
“This results in a fund that tends to beat its peers and benchmark when stock markets decline, but falls behind when they rally. This abnormal return profile makes the CF Ruffer Equity & General fund a good candidate for inclusion in a diversified portfolio,” explained analyst Charles Younes.
Grispos is currently sitting on 29 per cent cash, reflecting the manager’s cautious stance on equity valuations.
The fund’s equity content has a firm emphasis on quality large caps, with JP Morgan Chase and BP both top-10 holdings. One of his more esoteric positions is the Fidelity China Special Situations IT, which has a 1.7 per cent weighting.
The manager can also invest in bonds, which worked to his advantage in 2007 and 2008.
IMA Mixed Investment
The three mixed investment sectors have tighter guidelines when it comes to equity content. The Mixed Investment 20-60% sector, for example, requires funds to have between 20 and 60 per cent in equities.
On a relative basis, few compare to the £622m AXA Framlington Managed Balanced fund, which has achieved first or second quartile returns in its IMA Mixed Investment 40-60% sector for the last 10 consecutive calendar years.
FE data shows that Peirson, who recently celebrated his 20th anniversary of running the fund, protected marginally better against the downside than his sector in 2008 and 2011, but also outperformed in 2009, 2010, 2012 and 2013. In all four of these up years, the fund delivered double digit returns.
Unsurprisingly, this has resulted in very strong outperformance over the medium and long-term.
Performance of fund and sector over 10yrs
Source: FE Analytics
The fund doesn’t excel in risk-adjusted returns in the same way as Ruffer, in that it has actually been more volatile than its sector average. Peirson has actively moved his equity, bond and cash exposure to take advantage of valuations, but doesn’t have an active defensive focus.
For something a little more defensively minded, once again a Ruffer fund stands out from a risk-adjusted return point of view when looking at the mixed investment sectors as a whole.
FE Alpha Manager Steve Russell’s Total Return fund is a star performer in down markets, managing a staggering 20.86 per cent in 2008, when its IMA Mixed Investment 20-60% sector average lost more than 20 per cent.
With the exception of 2012 when the fund only managed returns of 1 per cent, it has held its own in rising markets as well in recent years.
In 2013, for example, the manager’s high gold and inflation-linked bond exposure was offset by a 20 per cent position in Japanese equities. It made 9.69 per cent, just beating its sector.
The fund has been one of the least volatile funds in its sector over the past decade, and is a top decile performer over 10 years. Over the market cycle – in this case seven years – it stands out in risk-adjusted return terms.
Risk/return of mixed investment funds over 7yrs
Source: FE Analytics
FE Trustnet will be sharing the views of Russell in a number of exclusive articles in the coming weeks.
