Volatility is set to remain a fixture in markets this year due to today’s credit crisis environment muddying outlooks, according to Square Mile’s Jason Broomer.
The head of investment believes that returns are likely to remain low across all asset classes this year and, combined with volatility, is likely to push many portfolios under the water throughout 2016.
Many investors have retained their pessimistic and cautious outlooks this year following 2015’s choppy, sideways market caused by China’s growth slowdown and plummeting commodity prices.
Performance of indices in 2015
Source: FE Analytics
Despite investors hoping that the New Year would signify a fresh start, sentiment remains bruised and even led to the FTSE entering a bear market earlier this week. 
As such, Broomer (pictured) says that individuals who aren’t willing to face up to paper losses on their capital are presented with a “real problem”.
“Cash rates are set to remain at negligible levels for an extended period and can investors really afford to take such a conservative approach to managing their affairs? The phrase ‘reckless conservatism’ has never been so apposite,” he said. “Many of those in retirement have time horizons that are measured in decades.”
“Investors weary and wary of the swings in financial markets may wish to look funds which are more focused on generating absolute returns. Such funds do place investors’ capital at risk, but are constructed in such a manner that the performance is less exposed to the vagaries of the markets.”
The head of investment points out that these types of funds can be found under a wide range of investment mandates, one of which being a highly conservative and “plain vanilla” bond fund.
An example of this is the AXA Sterling Credit Short Duration Bond fund, which has been managed by Nicolas Trindade since its launch in November 2010.
Over this time frame, the £264m fund has provided a total return of 10.5 per cent, underperforming its peer average in the IA Sterling Corporate Bond sector by 17.84 percentage points, but with three times less annualised volatility and a significantly lower maximum drawdown.
Performance of fund vs sector since launch
Source: FE Analytics
It also has an FE Risk Score of six, which suggests that the fund is 6 per cent as risky as the FTSE 100 index.
Trindade looks to provide steady returns with minimal volatility, particularly in relation to the fund’s interest rate sensitivity. To do this, the fund mostly holds sterling corporates with maturity dates of less than five years, and tends to differ from the market in terms of both maturity rates as well and its lower weighting in bonds issued by financial institutions.
AXA Sterling Credit Short Duration has a clean ongoing charges figure (OCF) of 0.43 per cent and yields 1.9 per cent.
Another example that Broomer gives of a highly conservative fund is the Monument Bond fund, which is £212m in size and has a risk score of seven. It resides in the IA Specialist sector and aims to achieve income that is attractive relative to interest rates while also retaining a strong focus on capital preservation.
It has outperformed its three-month LIBOR benchmark by more than five times since its launch in 2009, and has done so through a portfolio of UK and European fixed interest holdings. Monument Bond has a clean OCF of 0.99 per cent and yields 2.28 per cent.
A slightly different “safety first” approach that is slightly more complex, according to Broomer, is adopted by the likes of Newton Global Dynamic and JPM Strategic Bond funds.
The former is headed up by Paul Brain, who abides by the theory that no company, economy or market should be viewed in isolation, and therefore adopts a global, top-down approach to investing.
The £1.5bn fund aims provide both income and long-term growth, and over the last five years has provided a total return of 13.5 per cent. It has a clean OCF of 0.69 per cent and yields 2.12 per cent.
JPM Strategic Bond’s management team, on the other hand, focuses on bridging the gap between reality and perception within the bond market, and aims to dispel the belief that bonds are safe investments when they can in fact be volatile. As such, its portfolio aims to deliver bond-like returns on the upside but protects capital on the downside through active asset allocation.
The fund has returned 8.35 per cent over five years, underperforming its peer average in the IA Sterling Strategic Bond sector average by 17.63 percentage points, but has done so with a top-decile annualised volatility and maximum drawdown.
Performance of fund vs sector over 5yrs
Source: FE Analytics
JPM Strategic Bond has a clean OCF of 0.68 per cent and yields 3.93 per cent.
“Alternatively, investors may wish to consider placing cash with very cautious, broadly diversified-funds.” Broomer added.
He says that these tend to use more “involved” investment processes, and highlights the likes of FE Alpha Manager Iain Stewart’s Newton Real Return fund as adopting a relatively straight-forward strategy.
The £9.1bn fund’s process begins with aiming to generate returns of cash plus 2.5 per cent net of fees while maintaining a volatility between that of equities and bonds.
Stewart believes that the ultimate risk to any investment is permanent capital loss as opposed to shorter term volatility, and as such chooses assets without reference to a benchmark that represent fair valuations on a long-term basis.
Newton Real Return has a multi-asset portfolio consisting of global fixed interest, developed market equities, convertibles and a small amount of alternative investments.
It has a clean OCF of 1.11 per cent and yields 2.22 per cent.
Finally, Broomer points out that there are more complex and sophisticated funds that are broadly diversified and offer downside protection, such as Standard Life GARS and Aviva Multi-Asset Strategy Target Return.
Both funds aim to smooth some of the highs and lows provided by markets. Interestingly though, the ‘darling’ of the absolute return space GARS has underperformed the Aviva fund which was launched 18 months ago. While the former has provided a total return of 3.34 per cent since July 2014, Aviva Multi Strategy Target Return – which was set up by ex-GARS senior manager Euan Munro – has provided a total return of 9.34 per cent.
Performance of funds since Aviva MASTR’s launch
Source: FE Analytics
Standard Life GARS has a clean OCF of 0.89 per cent and yields 1.89 per cent, while Aviva Multi-Asset Strategy Target Return has a clean OCF of 0.85 per cent.
