Data from FE Analytics shows the average fund in the IA Flexible, Mixed Investment 0%-35% Shares, Mixed Investment 20%-60% Shares and Mixed Investment 40%-85% Shares sectors made annual returns that were just basis points apart during 2014.
As the graph shows, the highest return was from the IA Flexible sector with a 4.89 per cent gain while the lowest came from the Mixed Investment 0%-35% Shares, where the average member was up 4.84 per cent. The other two sectors posted average returns in this five basis point bracket.
Performance of sectors over 2014
Source: FE Analytics
Of course, returns at the level of individual funds are more widely spread out. The highest returning fund handed its investors a 17.24 per cent gain while the lowest returns were a 7.35 per cent loss.
But this is by far the closest average annual returns ever posted by the four sectors. In 2013, example, the lowest-risk IA Mixed Investment 0%-35% Shares sector made 4.20 per cent, 20%-60% Shares gained 8.85 per cent, 40%-85% Shares rose 9.97 per cent and Flexible was up 10.13 per cent.
In the down year of 2011 the average 0%-35% Shares fund made a small return of 1.38 per cent but the higher risk sectors all lost money in gradually increasing amounts, with Flexible Investment falling the most with an 8.73 per cent average decline.
Back to 2014 and the closeness in returns were not mirrored in other metrics such as volatility and maximum drawdown, which shows how much an investor would have lost if they bought and sold units at the worst possible times.
The average IA Mixed Investment 20%-60% Shares fund had annualised volatility of just 3.13 per cent with a maximum drawdown of 2.22 per cent. Within Flexible Investment, on the other hand, average annualised volatility was 7.80 per cent while maximum drawdown was 6.14 per cent.
As the graph on the first page shows, the higher risk sectors actually underperformed the lower risk ones for most of the year before making a comeback in its last few months.
Jonathan Webster-Smith, head of the managed service portfolio team at Brooks Macdonald Asset Management, said: “Risk didn’t particularly pay in 2014 unless you were in the right areas.”
“Last year all the assets - whether you were in low risk or high risk - returned generally the same but there were two things that moved you above or below that: US equity exposure or gilts and dollar corporate bonds. If you were exposed to those particular areas, you outperformed and if you weren’t, you didn’t.”
Most of the ultimate outperformers do come from the Flexible sector - 12 of the 30 highest returners are in this peer group. But then again, 13 of the 30 worst returners are also from this sector.
Meanwhile, the other sectors are well represented in the 30 highest gains. Ten are from the Mixed Investment 40%-85% Shares sector, five are from 20%-60% Shares and three are from 0%-35% Shares
Looking across the average asset allocations of the four sectors shows that returns in the Flexible Investment sector are likely to have been driven by the US. A typical fund in this sector has 10.70 per cent in US equities, with another 17.40 in international equities; just 8.90 per cent is in bonds.
The remaining three sectors have much more in bonds: Mixed Investment 0%-35% Shares has 55.50 per cent in fixed income, 20%-60% Shares has 34.50 per cent and 40%-85% Shares has 37.60 per cent. However, most would have gone into 2014 on the wrong side of the duration trade, which held back overall returns relative to the strong advance made by gilts.
All three of these peer groups have far less in US equities than the Flexible sector. Mixed Investment 40%-85% Share has the most at 6.90 per cent on average but the other two are less than 4 per cent.
Webster-Smith suggests that bonds have given multi-asset funds “a disproportionate return” in 2014, as well as over recent years, but points out that this cannot last forever as yields move lower. He says that multi-assets funds will need to look for alternative approaches to bonds as traditional strategies become less likely to achieve returns.
“Bonds are a mathematical game - there’s a formula and you know when you’ll make money and when you’ll lose money. That’s why it’s become a difficult investment decision now to go into bonds and when to sell them if you’re in them,” he said.
“But that’s going to be part of the differentiated performance in the future, although maybe not this year with the election on the horizon and uncertainty that comes with this.”
Another consequence of last year’s strange outcome for multi-asset funds is that diversification did not pay for investors. As Webster-Smith points you made money if you owned US stocks and government bonds and you found it hard to break away from the pack if you didn’t.
A good example can be seen in the best performing mixed investment portfolio of the year - the £26.5m Thesis iFunds Spectrum Orange fund, which resides in the Flexible sector and made 17.24 per cent in 2014.
Performance of fund vs sectors over 2014
Source: FE Analytics
The fund is likely to be off the radar of most investors and it is a computer-based trend and momentum strategy, which has the ability to make dramatic asset allocation changes depending on where its analysis highlights the most favourable opportunities.
Earlier on in the year, the fund had a mix of assets with positions including UK corporate bonds, Japanese stocks, global emerging markets and property. However, as the momentum behind US equities and gilts grew it started to allocate increasing amounts to these areas.
FE Analytics shows that the shift towards these areas started in August - which as the graph above shows is when the fund really started to break away from the average multi-asset portfolio.
By the end of 2014, 58.50 per cent of Thesis iFunds Spectrum Orange’s assets were in US equities and 22.60 per cent was in gilts, along with a smaller allocation to short commodities strategies, which explains its strong performance as the year came to a close.
However, it must be remembered that past performance is no guide to future returns and diversification is a cornerstone of good investment practice. While US stocks and gilts had a strong 2014, other assets have had a better start to 2015 and multi-asset funds could start to differentiate themselves as new winners emerge.
To highlight opportunities for differentiated returns, FE Trustnet will quiz leading multi-asset managers to find the out of favour areas they are tipping to come into their own in the future.
