Defensive multi-asset funds have come pressure recently, as investors worry that cautious asset classes such as bonds and property are at risk of a correction due to the likelihood that interest rates will soon rise.
Thoughts are turning to the ‘taper tantrum’ of May 2013 when then Federal Reserve chairman Ben Bernanke warned the market that the central bank was considering reducing its quantitative easing programme.
This negatively impacted a wide range of assets, as shown in the graph below, which shows the value of equities, bonds and gold over the month following the announcement.
Performance of indices 1month after taper tantrum
Source: FE Analytics
Investors are now questioning how traditionally defensive assets such as bonds will hold up when interest rates start to rise – and what effect this will have on the cautious funds that build their portfolios around them.
In an article earlier this year, Margetts’ Toby Ricketts (pictured) warned that buying into supposedly safe government bond markets to hedge against equities could lead to cautious funds being hit by both low returns and high risk.
“You’ve got to wonder, are they buying them to make money or as a form of insurance?” Ricketts questioned.
“If it’s for insurance, the danger will come. The reason why a lot of managers see them as a form of insurance is because bonds have typically been negatively correlated to equity markets.”
Marcus Brookes, who heads up the multi-manager team at Schroders, also believes that holding a large weighting in bonds within a cautious portfolio could be a dangerous strategy at the moment.
Speaking to FE Trustnet in January, he explained that he prefers to use cash and alternative investments to minimise risk and that he has been bearish on bonds for a while.
“The fixed income market is a real struggle for everyone,” he explained. “This was the main reason we produced fourth quartile returns over the course of 2014 and that may make you think we should reassess our view.”
Performance of fund vs sector over 2014
Source: FE Analytics
Schroder MM Diversity, the team’s lowest risk fund, currently has a 28.64 per cent weighting in cash, 27.38 per cent in alternative investment strategies and 13.99 percent in UK equities, according to data from FE Analytics.
In the following article, FE Trustnet takes a look at the top-rated cautious multi-asset funds and why they could stand up to looming market turbulence.
CF Ruffer Total Return is headed up by FE Alpha Manager duo David Ballance and Steve Russell, who primarily aim for low volatility and positive returns.
Currently, the £3.1bn fund holds a 27 per cent weighting in UK gilts, 19 per cent in Japanese equities, 10 per cent in cash and 10 per cent in global fixed interest securities. The fund also has positions in North American, European and UK equities.
While the fund has underperformed its peer average in the IA Mixed Investment 20%-60% Shares sector over five years due to its cautious positioning, it has outperformed its sector by more than double over 10 years, providing a top-decile return of 127.15 per cent.
Performance of fund vs sector over 10yrs
Source: FE Analytics
What’s more, it has achieved top-decile annualised volatility, Sharpe ratio, maximum drawdown and alpha rating, which measures performance in excess of its benchmark.
CF Ruffer Total Return has made it onto the FE Research Select 100 list for its high regard among the AFI panel of leading financial advisers, its ‘outstanding’ status achieved in the FE Group Awards and the fact that it is run by two FE Alpha Managers.
The FE Research team said: “The fund falls in the IMA Mixed Investment 20-60% Shares sector rather than IMA Absolute Return, but its managers focus on protecting investors’ money rather than beating rivals. Unlike many absolute return funds, the team has a good record of meeting its objectives, with only a few exceptions over the fund’s history.”
“The investment process relies on a constant review of the fund’s allocation between greed and fear assets, which requires the team to correctly call the state of the global economy. It also depends on the team’s capacity to identify a range of assets with contrasting behaviours. This task is becoming more complicated as the current economic challenges are having an equally negative effect on most types of investment. Nevertheless, we are confident the team have enough experience to maintain the fund’s strong performance.”
CF Ruffer Total Return has a clean ongoing charges figure (OCF) of 1.23 per cent and yields 1.35 per cent.
Invesco Perpetual Distribution
Also in the IA Mixed Investment 20%-60% Shares sector, Invesco Perpetual Distribution is a five FE Crown-rated fund that has made its way onto the FE Research Select 100 list.
Managed by Paul Read, Paul Causer and Ciaran Mallon, the £3.4bn fund consists of two parts – while Causer and Read run the bond portfolio, Mallon, who joined the management team, in 2013 looks after the equity holdings.
While the fund’s largest weighting is currently in equities at 32.97 per cent, the FE Research team points out that this is because of the management team’s gloomy outlook for bonds and that they have actually increased their holdings in cash and very low-risk securities.
As such, they warn investors that the portfolio is likely to make smaller gains that it has in the past and that most gains are likely to come from income rather than growth.
Over the last five years, it has managed to outperform its peer average by 18.12 percentage points, returning 54.21 per cent.
Performance of fund vs sector over 5yrs
Source: FE Analytics
Invesco Perpetual Distribution has also been awarded an ‘AA’ rating by the Square Mile team, who says that Read and Causer’s strong track record managing the mixed asset mandate across varying market cycles is not to be sniffed at.
“In our opinion, they have established a comprehensive and thoughtful process that has a strong awareness of macroeconomic factors and valuations,” the team said.
“They are pragmatic investors who are readily prepared to orientate the portfolio towards the most attractive opportunities, whilst remaining within the bounds of the mandate. We think the fund could have appeal for investors seeking an actively managed, diversified fund of primarily bonds and equities.”
Invesco Perpetual Distribution has a clean OCF of 0.82 per cent and yields 4.34 per cent.
Chase de Vere’s Patrick Connolly says that JPM Multi Asset Income is his favourite defensive multi-asset fund pick at the moment.
“This fund looks to achieve the best risk adjusted income, which can be taken either monthly or quarterly or reinvested, by investing in a wide range of underlying assets including equities, fixed interest and REITs [real estate investment trusts],” he said.
“The current yield is 3.7 per cent and, while income is the main objective, the fund also targets capital preservation and low volatility by investing in around 1,600 underlying holdings.”
The five FE Crown-rated fund, which is managed by Michael Schoenhaut and Talib Sheikh, currently holds only 0.3 per cent in fixed interest securities. Its largest weighting is in equities at 46 per cent; the fund also holds 22.4 per cent in corporate bonds, 8.3 per cent in mortgage-backed securities and 6.7 per cent in real estate.
While the fund could be deemed as slightly higher risk than the aforementioned funds, Sheikh told FE Trustnet earlier this week that investors are fearing the worst when it comes to rate hikes, arguing that rates will remain lower than in previous cycles even when the Fed does move.
“If we step back slightly, we’re five years into expansion and we’re the longest expansion the global economy has ever seen. I see no signs that it’s ending any time soon so that tells you we’re in a non-normal world post the financial crisis,” he said.
“There are some global economies, particularly the US, that are healing, but we just disagree with the notion that the interest rate cycle is going to be things that we were used to pre-2008.”
Over five years, JPM Multi Asset Income has achieved a total return of 46.94 per cent, compared to its sector average which has returned 36.09 per cent.
Performance of fund vs sector over 5yrs
Source: FE Analytics
The fund has a clean OCF of 0.83 per cent and yields 3.7 per cent.
