Earlier this year, FE launched five multi-asset sectors that grouped members according to their risk profiles, examining the historic volatility of funds compared with the FTSE 100. Around 250 funds have been placed in the sectors, so investors have a wide range of options to choose from.
Balanced funds have been a persistent favourite with investors as they appear to offer a compromise between risk and returns. Notable portfolios in this area include Bambos Hambi's £359.1m Standard Life Investments MyFolio Managed IV, Gary Potter and Robert Burdett's £159.8m F&C MM Lifestyle Balanced and Paul Craig's £742.8m Henderson Cirilium Moderate funds.
There are 59 funds that have been placed in FE’s UK RTMA Risk Band 3 sector, which is the ‘middle’ sector with members having FE Risk Scores of between 50 and 70, but two portfolios have managed to aggressive-style returns with balanced-type volatility over the seven years of the most recent market cycle. M&G Episode Balanced
FE Analytics shows Juan Nevado (pictured) and Tony Finding’s £346.29m M&G Episode Balanced fund has returned 51.86 per cent over the past seven years, outperforming its sector average of 35.36 per cent and the 40.25 per cent rise in the FTSE All Share.
In fact, it has significantly outpaced the 40.29 per cent return made by the average fund in the UK RTMA Risk Band 5 sector, which is the most aggressive sector where members have FE Risk Scores of more than 85.
Performance of fund versus peers and FTSE All Share over 7yrs
Source: FE Analytics
It has achieved these returns with about the same annualised volatility than its peer group average over the seven years in question, with our data showing it stands at 9.77 per cent compared with the sector’s 9.55. The UK RTMA Risk Band 5 sector, meanwhile, has annualised volatility of 14.33 per cent.
The five crown-rated M&G Episode Balanced has done a good job of protecting investors’ money in down markets. It lost just 2.62 per cent in 2011, making it the best performer in the sector when the average UK RTMA Risk Band 3 fund fell 17.56 per cent. Likewise, it was down 2.69 per cent in 2011 when its average peer dropped 4.64 per cent.
In rising markets, however, it tends to perform less well than its rivals. For example, in 2013 the fund rose 9.32 per cent compared with the peer group’s average of 11.81 per cent, placing it 45th out of 48 portfolios.
Over 2014 to date, which has seen a number of markets trade relatively sideways, the fund is again the best performer in its sector. It has returned 6.91 per cent over the first nine months of the year, against the sector’s 4.31 per cent.
In terms of positioning, 56 per cent of the portfolio is in equities with Europe being the largest geographic bet at 13.20 per cent. Some 22.8 per cent is in government bonds, 5.9 per cent is invested in corporate bonds and 6.3 per cent is in property.
The fund’s largest holding is Fiona Rowley and Justin Upton's £3.4bn M&G Property Portfolio, which provides all its property exposure. Tom Dobell’s £6.3bn M&G Recovery fund is the largest biggest position, followed by exposure to the Topix index, Mexican government bonds and US 30-year treasury bonds.
M&G Episode Balanced has a clean ongoing charges figure (OCF) of 0.93 per cent.
CF 7IM Balanced
The £642.5m CF 7IM Balanced fund is another portfolio in the UK RTMA Risk Band 3 sector that has achieved strong returns over the last market cycle with annualised volatility of below 10 per cent.
According to FE Analytics, the three FE Crown-rated fund is up 39.84 per cent over the seven years of the past market cycle. While this is just below the 40.25 per cent made by the FTSE All Share, it is still ahead of the 35.36 per cent gain made by its average peer and close to the 40.29 per cent made by the aggressive UK RTMA Risk Band 5 funds.
Performance of fund versus peers and FTSE All Share over 7yrs
Source: FE Analytics
Its annualised volatility, on the other hand, is much lower than the sector’s and the FTSE All Share’s at just 8.36 per cent.
The fund’s maximum drawdown over seven years, which shows the loss an investor would have incurred if they bought at its peak and sold at its trough, is just 19.28 per cent. This compares favourably with the 28 per cent maximum drawdown of its sector and the FTSE All Share’s 45.28 per cent.
CF 7IM Balanced also performed well for its investors in the down market of 2008, when it lost 9.95 per cent compared with the sector’s 17.56 per cent fall and the All Share’s 29.93 per cent drop. However, its losses were slightly higher than its average peer in 2011 at 5.19 per cent.
According to its latest update, the portfolio’s largest overweights are to Japanese equities and emerging market bonds. The managers currently prefer Asian equities over developed markets such as the UK and the US, as they believe valuations are less stretched, long-run growth prospects are better and the revival of Japanese economy could spark a jump in trade across the region.
Some 52.7 per cent of fund is in equities, with the UK accounting for 13 per cent through offerings such as Majedie UK Equity. Its Japanese active management comes from GLG Japan Core Alpha Equity and Baillie Gifford Japanese Equity.
Bonds make up 30.5 per cent of the portfolio, which includes products such as the PIMCO Income, Invesco Sterling Bond, Loomis Sayles High Yield Bond and Ashmore EM Bond Total Return funds. It also has 8.7 per cent allocated to other assets, with 2.8 per cent in private equity and debt, 3 per cent in real estate, 1 per cent in hedge funds and 1.9 per cent in currency funds.
CF 7IM Balanced has a clean OCF of 1.37 per cent.