With the prospect of higher interest rates in the US and the UK, further economic woes in Europe, Japan and China and as investors in equities have generally made a lot of money over the last five years or so, many experts anticipate high levels of volatility from stock markets next year.
At the same time, bond yields have once again fallen to historic lows prompting some to say that there will be “devastation” in the fixed income market in 2015 as liquidity is diminishing and the US Federal Reserve has stated its intention to raise rates.
Throw in the fact that commodity prices are, and are expected to remain, weak it seems that building a portfolio for next year could be very difficult for advisers and retail investors.
David Vickers, who heads the Russell Investments Multi-Asset Growth Strategy fund, says it could well be make or break for professional multi-asset investors as well.
“Next year is going to be a real test for multi-asset managers like me because there aren’t many asset classes that look attractive or good value,” Vickers said.
“The risks are a little higher going into 2015 than they were going into 2014 as now we are talking about the prospects of higher interest rates and that is going to cause instability. If you think about it, everything is priced off the risk-free rate, so if that moves or is unstable it’s going to cause fluctuations in financial markets.”
Rob Morgan, pensions and investment analyst at Charles Stanley Direct, agrees with Vickers.
He therefore says investors need to stick with high quality and experienced multi-asset managers who have a high degree of flexibility if they are looking for a one-stop-shop going into next year.
“This year has shown that asset allocation really matters and I expect the same of 2015 – a chance for multi-asset managers to earn their stripes,” Morgan (pictured) said.
“The definition of multi-asset is a bit loose really and I do think managers have to go beyond equities, bonds and cash to call themselves multi-asset. I would also include multi-manager funds where applicable in the definition.”
“Problems in the past have stemmed from managers assuming that historic non-correlations of asset classes in the past would continue, but as 2007/08 showed a great many asset classes fell in tandem.
He added: “Multi-asset managers therefore have to think outside the box and make brave, high conviction calls on the macro – not an easy task.”
With that in mind, Morgan highlights the three genuine multi-asset teams he rates highly and who he thinks can navigate investors through what is likely to be a very difficult market.
Jupiter Merlin
“Two teams I respect are the Jupiter Merlin team and Gary Potter and Rob Burdett at F&C. Both run a variety of funds and take a high conviction approach, which offers the opportunity for outperformance,” Morgan said.
The Jupiter Merlin team of FE Alpha Managers John Chatfeild-Roberts, Algy Smith-Maxwell and Peter Lawery are commonly regarded as some of the best and most experienced multi-managers available to retail investors – and they certainly run one of the largest pots of money.
The largest of their offerings is the £4.5bn Jupiter Merlin Income Portfolio, which like all of their offerings is a fund of funds.
It was launched way back in 1992 and according to FE Analytics it has been the fourth best performing portfolio in the IMA Mixed Investment 20%-60% sector over 10 years with returns of 97.61 per cent.
Performance of fund vs sector over 10yrs
Source: FE Analytics
It has also been among the best performers for its annualised volatility, Sharpe ratio and maximum drawdown over that time.
Jupiter Merlin Income, which currently yields 2.9 per cent, has 45 per cent in equities, 33 per cent in fixed interest and 19 per cent in “others”. For equities, the fund uses the likes of CF Woodford Equity Income, M&G Global Dividend and Newton Asian Income.
In terms of bond funds, it uses M&G UK Strategic Corporate Bond, Jupiter Strategic Bond and Kames High Yield Bond and the “others” bracket includes a gold ETF and the Mayfair Capital Commercial Property Trust.
Its ongoing charges figure (OCF) is 1.61 per cent.
F&C MM Navigator
Gary Potter and Rob Burdett’s F&C MM Navigator range, while smaller than Jupiter Merlin, is also widely respected and is one of Morgan’s favourites.
The two managers run five portfolios as part of their range, the largest being the £1bn F&C MM Navigator Distribution fund, which also sits in the IMA Mixed Investment 20%-60% sector.
According to FE Analytics, it has returned 41.83 per cent since launch in October 2007, while the average fund in the sector has returned 28.68 per cent. It has also been top quartile for its Sharpe ratio, which is a measure of risk adjusted returns, and its annualised volatility.
Performance of fund vs sector since Oct 2007
Source: FE Analytics
It has outperformed the sector in each calendar year since its launch, except for 2011, but is currently underperforming in 2014.
Potter and Burdett hold 31.5 per cent in fixed income, 20.8 per cent in UK equities and 18.3 per cent in specialist equities. Top 10 holdings include JOHCM UK Equity Income, GLG Strategic Bond, Legg Mason Income Optimiser and Artemis Global Income.
Its OCF is 1.53 per cent.
Artemis Strategic Assets
“Outside the multi-manager world, I think William Littlewood’s Artemis Strategic Assets is a top quality fund,” Morgan said.
The £935m fund sits in the IMA Flexible Investment sector and Littlewood can take both long and short positions to protect his investors. The manager’s stated aim is to provide longer term positive returns under most market conditions, outperforming both cash and equities over rolling three-year periods.
It is genuinely multi-asset and, unlike the two other funds mentioned, Artemis Strategic Assets invests in direct securities
The fund was launched in May 2009 and since inception it is trailing behind the sector with returns of 59.64 per cent. That is largely due to Littlewood’s short positions in fixed income as he think bond yields will have to rise.
This has hurt his fund this year especially as the fund is down 0.37 per cent.
Performance of fund vs sector in 2014
Source: FE Analytics
Nevertheless, Littlewood has developed a strong following with many saying his positioning will be correct, but it is just too early.
The fund is net short government bonds, has 64.5 per cent in equities (including stocks like Lloyds, Samsung, Nestle and Just Retirement Group), 11.3 per cent in commodities and a chunky 24.5 per cent in cash.
Its OCF is 0.84 per cent.
