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Risk-targeted funds yet to bounce-back from summer sell-off

27 November 2015

FE Analytics shows that all but one fund from our custom risk-targeted sectors have yet to fully recover from the sell-off that has stalked markets over recent months.

By Gary Jackson,

Editor, FE Trustnet

Almost every fund in FE’s five risk-targeted sectors is in negative territory over the months since markets peaked in the spring, according to FE Trustnet research, with a number of portfolios posting bigger losses than the FTSE All Share.

The FTSE 100 reached a record high at the end of April but the summer and autumn months were marked by increased volatility as issues such as the Federal Reserve’s interest rate plans, slowing economic growth in China and plunging commodity prices spooked investors.

FE Analytics shows that the FTSE All Share is down 7.48 per cent since 27 April while the FTSE 100, which is dominated by international-facing businesses and those in the energy and mining sectors, has lost 8.77 per cent.

Furthermore, the average risk-targeted fund has lost money over this period. FE launched a universe for risk-targeted, multi-asset funds last year as there are no dedicated sectors for these funds in the Investment Association universe; we have used these in this study.

As would be expected, FE’s UK Risk Targeted Multi Solutions risk band 1 sector – which comprises the funds deemed to be most cautious – has posted the smallest average fall of 2.05 per cent while the highest risk sector has lost the most. It’s 7.63 per cent average loss is higher than the FTSE All Share’s.

Performance of sectors and index since 27 April 2015

 

Source: FE Analytics

It’s a much better picture if the time frame is widened slightly to the start of the year. Since 1 Jan, 201 of the 244 funds have made a positive return and 107 have done better than the FTSE All Share’s 1.68 per cent rise.

M&G Episode Macro leads the pack here with its 8.69 per cent gain.

Ryan Hughes, fund manager at Apollo Multi Asset Management, notes that the UK has been hit harder than many of its global peers by the recent falls. The S&P 500, for example, is up 0.88 per cent since 27 April while the Nikkei 225 has fallen just 2.81 per cent.

This has hurt many UK-based multi-asset managers, as they tend to have a bias towards the domestic market.

“Certainly the period since the markets peaked in April has been challenging and all major markets have not regained the ground since that point,” Hughes said.

“In particular, the FTSE 100 index has really struggled since this point, being held back by its large expose to oil and mining companies which have been hit by events in China. With so many managers running a structural home bias, their weights to the UK market have been a real drag on performance.”

“In addition to this, the fixed interest market has also performed poorly with UK gilts losing money and UK corporates losing even more. The vast majority of risk-targeted funds have significant exposure to fixed interest and in periods when this asset doesn’t perform, it is expected that we see these types of funds struggle.”


 

Our data shows that the only fund to be in positive territory over this period is Marlborough Defensive, which is up 0.33 per cent.

 

Source: FE Analytics

The fund, which is managed by Nicholas Cooling, Gurjit Soggi, Rajesh Manon and Sarah Sampson, resides in the risk band 5 sector and has the objective of providing capital growth through a low to medium risk portfolio.

It takes a fund of funds approach to investing and its largest weighting is to property at 22.2 per cent of assets, followed by absolute return strategies at 18.3 per cent and global equities at 15.1 per cent.

However, it must be noted that the fund is the worst performer in its sector over one, three and five years. It appears to come into its own in severely testing markets, as in addition to being the best performer since 27 April it was one of the best funds in its peer group in the down year of 2011 after grinding out a 1.91 per cent return.

Given that equities have felt the brunt of the sell-off it’s no surprise to see that cautious funds top the performance tables, thanks to their higher allocations to bonds, cash and other defensive assets.

Architas MA Active Reserve, which is in second place, has a quarter of assets in global fixed income and one-fifth in property. FP 8AM Multi-Strategy Portfolio I has 48 per cent of its portfolio in bonds but its largest holding – at 10 per cent – is Old Mutual Global Equity Absolute Return.

Richard Philbin, who runs the 8AM fund, said in his most recent update to investors: “I feel like a broken record when I write these manager commentaries every month as markets continue to not behave rationally or logically. Markets continue to be volatile, we continue to be cautious.”

Hughes, whose FP Apollo Multi Asset Cautious fund is ranked eighth since 27 April, adds that looking outside traditional defensives like bonds and broadening out from UK equities has proved to be a prudent strategy over these turbulent recent months.

“At Apollo we take a different approach to asset allocation and are not forced to hold large amounts of bonds or run a large home bias in UK equities, both of which make little sense. We have had very low fixed interest exposure all year as fixed interest has looked overvalued, instead preferring UK physical commercial property which has been a big help to our performance,” he said.


 

“In addition, we have been short the FTSE 100 index – we were nervous ahead of the election and saw risk is the skewed composition of the index – which has added positively to returns while being overweight European and Japanese equities, both of which have outperformed the UK equity market.”

When it comes to the other end of the spectrum, the worst performer from our risk-targeted universe has been FP Multi-Asset DRP VIII, which has fallen by 13.07 per cent since 27 April. The fund is in our highest risk sector and as a result has most of its portfolio in equities, with 28 per cent in emerging markets – which have fallen harder than the UK.

 

Source: FE Analytics

Most of the funds listed above are in the risk band 4 and 5 sectors, although three - City Financial Multi Asset Growth, Old Mutual Spectrum 7 and Old Mutual Spectrum 8 – are in risk band 3, which is home to more balanced portfolios.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.