Investors are often told that diversification is the key to a successful portfolio as the major threat to a pot of savings is that it is overly reliant on just one or two outcomes.
Of course, diversification has always been central but in the current environment, experts say the need to spread risk within a portfolio has never been more important after six-year bull market in nearly all major asset classes.
Thanks in part to huge amounts of central bank intervention since the period after the financial crisis such as ultra-low interest rates and quantitative easing, the valuations on major bond and equity markets have been bid up to such an extent that correlations are now historically high, as shown by the graph below.
Performance of indices in 2015
Source: FE Analytics
This correlation has led a number of industry experts, such as the team at Hawskmoor, to warn that building a cautious portfolio has never been harder.
Investors can, of course, protect their savings by building a portfolio of highly-rated funds which focus on different areas of financial markets. However, for those who don’t have the time, information or ability to build a diversified portfolio of numerous funds there is always the option to turn to multi-asset managers who can make the big decisions for you.
Therefore, in this article we take a closer look at three of the FE Research team’s favourite multi-asset funds for investors or advisers who either want a core holding for their portfolio or clients or just a ‘one-stop-shop’.
Invesco Perpetual Distribution
We start with the five crown-rated Invesco Perpetual Distribution fund, which is seen as one of the best mixed-asset funds within the industry.
The fixed income part of the portfolio is headed-up by the highly-experienced duo of Paul Causer and Paul Read while its equity allocation is now under the responsibility of Ciaran Mallon following Neil Woodford’s departure from Invesco Perpetual last year.
Though it is a relatively traditional mixed-asset fund, Invesco Perpetual Distribution has performed very well over the long, medium and short term.
According to FE Analytics, the now £3.4bn fund has been the second best performing portfolio in the IA Mixed Investment 20%-60% sector over 10 years with returns of 94.46 per cent and also sits in the top quartile over three and five years.
Performance of fund versus sector over 10yrs
Source: FE Analytics
Those returns have also been consistent as Invesco Perpetual Distribution has outperformed in seven out of the last 10 calendar years – the exceptions being 2005, 2008 and 2014 though the fund hasn’t underperformed by more than 5 percentage points in any of those years.
While the outlook for bonds, and to a lesser extent equities, looks challenged, the FE Research team expects the Invesco Perpetual fund to continue to beat its peers from both total return and risk-adjusted return perspectives.
Like with any fund, though, the team says the fund carries risks that investors need to be aware of.
“The managers have a gloomy outlook for bonds and have been increasing their holdings of cash and very low-risk, low-yielding securities. This means the portfolio will probably make smaller gains than it has in the past.”
“Most gains should come from income rather than capital growth, they say. The position in bank debt remains very significant, which means the health of the banking system is important for this fund.”
“However, this will be slowly reduced as the bonds mature as the managers don’t see the same opportunity in the new bonds being issued.”
The fund, which yields 4.38 per cent, currently holds 63 per cent in various fixed income assets, 33 per cent in equities and 4 per cent in cash. Its ongoing charges figure (OCF) is 0.82 per cent.
Jupiter Merlin Income Portfolio
Those who don’t just want exposure to straight bonds and equities may want to turn to FE Alpha Managers John Chatfeild-Roberts and Algy Smith-Maxwell’s £4.2bn Jupiter Merlin Income fund, which also sits on the FE Select 100.
The team at Jupiter have been one of the leading lights in fund of funds investment and FE Research says it is good option for those who want a ‘one-stop-shop’ portfolio.
“Like all managers at Jupiter, Chatfeild-Roberts and his team enjoy a great degree of freedom when investing.”
“One downside to the fund-of-funds approach is the additional layer of charges and the cost of the fund is high compared with many other mixed-asset portfolios. However, the strong returns have more than made up for this. The fund is best used as a single investment solution rather than as part of a portfolio and this further justifies the high charges.”
According to FE Analytics, Jupiter Merlin Income has more than doubled the returns of the IA Mixed Investment 20%-60% sector over 15 years with gains of 143.6 per cent and has done so with better risk-adjusted returns (as measured by its Sharpe ratio), lower volatility and a lower maximum drawdown.
Performance of fund versus sector over 15yrs
Source: FE Analytics
While the fund is top quartile over 10 years and is outperforming over five, it has struggled over more recent time frames due the managers’ exposure to gold and emerging markets. However, they have since removed those positions from the portfolio.
Jupiter Merlin Income currently yields 3 per cent and holds 50 per cent in equities, 33 per cent in bonds and 16 per cent in alternatives. Its top 10 holdings include the likes of CF Woodford Equity Income, M&G Global Dividend, Jupiter Strategic Bond and M&G Strategic Corporate Bond.
Its OCF is 1.54 per cent.
For those who want a slightly more cautious approach and aren’t overly focused on income, another multi-asset fund of funds which features on the FE Select 100 is Schroder MM Diversity.
Managers Marcus Brookes and Robin McDonald have tended to be viewed as the upcoming challengers to the Jupiter Merlin team’s crown, but poor relative returns over recent years have led to concerns about their approach.
While Schroder MM Diversity has beaten the IA Mixed Investment 20%-60% sector and has outpaced the rate of inflation (which is its stated benchmark) since the managers took charge in October 2007, it underperformed more recently due to the managers more contrarian positioning – as the FE Research team explains.
Performance of fund versus sector and index since Oct 2007
Source: FE Analytics
“The uncertain environment has led the managers to position the fund very cautiously,” it said.
“Its cash allocation is high, because the team believes there is too much risk in bonds and capital is safer in money markets. The managers expect a more stable future for the eurozone and have a relatively high exposure to the region.”
“They do not have any US exposure anymore because they think the market is too expensive. If the dollar continues to strengthen and share prices keep outpacing the economic growth, this could hurt the fund.”
Currently, Brookes and McDonald hold a hefty 30 per cent in cash and 27 per cent in alternative investment strategies via funds such as JPM Income Opportunity, Majedie Tortoise and Morgan Stanley Diversified Alpha Plus.
The rest of the £1.4bn fund is mainly held in equities as traditional fixed income only accounts for 10 per cent of the managers’ assets.
However, while Schroder MM Diversity struggled last year and is down against the sector again in 2015, it must be pointed out that prior to that the managers outperformed in five out of the previous six calendar years.
Its OCF is also lower than most other fund of funds at 1.26 per cent.
