Standard Life GARS, M&G Property Portfolio and Stewart Investors Asia Pacific Leaders are among the most popular ‘balanced’ funds to be chosen by FE’s AFI panel over the last two portfolio rebalances.
As explained in last week’s article, the Adviser Fund Indices consist of funds chosen by leading financial advisers based on varying levels of risk appetite.
In this instalment, we take a look at the recommended funds for investors looking for a balanced risk and return ratio in their portfolios.
First up is the behemoth absolute return fund GARS, which uses a global macro strategy to provide a positive return in all market conditions over three-year rolling periods.
The team running the fund is split into three areas – one division identifies market inefficiencies based on the economic backdrop, the multi-asset team then devises strategies in terms of how to play these themes, and a risk team then ensures these strategies are as diversified and secure as possible.
This process has led to the £26bn fund boasting an annualised volatility that is less than half that of the MSCI AC World index and a maximum drawdown – which measures the most potential money lost if bought and sold at the worst times – that is less than one third of the index’s.
Over the same time frame, the three crown-rated fund has provided a total return of 22.98 per cent, outperforming its LIBOR GBP 6 Month benchmark by 18.8 percentage points.
Performance of fund vs benchmark and index over 5yrs
Source: FE Analytics
However, the fund has come under fire recently as it has made a loss of 2.72 per cent over the last year while its benchmark has returned 0.74 per cent. It must be noted though that the fund’s aim is to outperform its benchmark over three-year periods.
Standard Life GARS has a clean ongoing charges figure (OCF) of 0.89 per cent.
Stewart Investors Asia Pacific Leaders
Next on the list is Stewart Investors Asia Pacific Leaders, which has five FE crowns and is headed up by FE Alpha Manager duo Angus Tulloch and David Gait. This line-up is due to change though, as it was announced at the end of last year that Tulloch will step back from his role as manager at Stewart Investors.
While this news may have shaken many investors, a number of investment professionals urged investors to avoid any knee jerk reactions in an article published on the day of the news.
“My initial thoughts are that investors should probably do nothing because I’ve been lucky enough to meet with Angus and his team quite a bit, and I would say that out of all the teams I’ve met in the industry, they have probably put the most thought into session planning and genuine building of a talented and diverse team,” Premier’s Simon Evan-Cook said.
“As a holder of that fund, I would be very comfortable that it’s going to be in good hands going forwards.”
The £8.2bn fund aims to achieve long-term capital growth through extensive research on individual companies within the Asia Pacific region – this is conducted through the firm’s large team of analysts.
This has led to a concentrated portfolio of 44 stocks, with its top 10 holdings accounting for more than 40 per cent of the entire portfolio. These holdings include the likes of Australian holding company Brambles, Taiwan Semiconductor, Australian biotech firm CSL and Singapore mortgage broker OCBC.
The fund has more than quadrupled the performance of its benchmark and sector average over five years and has a top-decile annualised volatility, maximum drawdown and Sharpe ratio – which measures risk-adjusted returns – over the same time frame.
Stewart Investors Asia Pacific Leaders has a clean OCF of 0.9 per cent.
The third most-popular fund over the last two portfolio rebalances is TwentyFour Dynamic Bond, which has five FE crowns and is £1.4bn in size.
It is run by Eoin Walsh, Gary Kirk, Felipe Villarroel and Pierre Beniguel and aims to provide both income and growth through a wide range of fixed income assets, including government bonds, corporates, mortgage-backed securities and banks. However, it is unlikely to hold emerging market debt or currencies and hedges back to sterling.
The unconstrained fund has a total of 193 holdings, most of which are European or UK assets although some will also be US-based.
These holdings are chosen through each manager researching an assigned market area, as well as through a monthly investment committee that scrutinises the broader macro picture to identify geographic and political risks.
Over five years, the fund has provided a total return of 33.36 per cent, outperforming its peer average and benchmark by 8.09 and 30.07 percentage points respectively.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
Despite its strong returns over the medium term though, the fund has provided a loss over one year and six months, placing it in the bottom quartile over both of these periods. It is also in the bottom quartile for its annualised volatility and maximum drawdown over the last five years, suggesting that it should be held alongside lower-risk fixed income funds for a balanced portfolio.
TwentyFour Dynamic Bond has a clean OCF of 0.8 per cent and yields 5.37 per cent.
The next fund on the list is M&G Property Portfolio, which has been headed up by Fiona Rowley since 2013 and is £4.6bn in size.
The investment vehicle holds a total of 184 direct UK commercial properties across various market sectors including standard retail, retail warehouse, shopping centres and offices. Its largest weighting is in the South East of England, although it also has significant weightings in the Midlands, the North and Scotland while allocating only 4.5 per cent to central London.
The team combines market forecasts and detailed research views on rental growth, risk premiums and depreciation rates before selecting holdings and makes sure to adopt an active management style.
While the fund aims to be as fully invested as possible, it will hold at least 15 per cent of its weighting in liquid assets and currently has a 9.7 per cent cash weighting.
The Square Mile team, who awarded the fund a ‘recommended’ rating, said: “The team has a disciplined and proven investment approach and is extremely aware of the importance of income, liquidity and the main drivers of the property market.”
“In particular, the liquidity profile of the fund is closely monitored and the team is cognisant of the potential issues facing an open-ended fund investing in an illiquid asset class.”
The fund, which has delivered a top-quartile return over three years but has been below-average over five and 10 years, has a top-quartile maximum drawdown, annualised volatility and Sharpe ratio over one, three and five years.
M&G Property Portfolio has a clean OCF of 1.14 and yields 3.11 per cent, though has recently changed its pricing basis of their property funds from an offer to a bid basis thanks to net fund flows.
The final fund on the list of most popular vehicles in the AFI Balanced portfolio is Threadneedle UK Property, which is also a direct property fund.
Similarly to M&G Property Portfolio, the fund invests predominantly in commercial property and has a significant weighting in Southern England at 65.7 per cent, which is a 41.2 percentage point overweight versus its IPD Monthly benchmark. It also has a third more exposure to the industrials sector than its benchmark at 29.2 per cent
Managers Gerry Frewin and Don Jordison focus on income to bolster the fund’s total return because inflows into the property sector drastically affect property valuations.
As such, they aim to buy into high-yielding assets that are therefore cheap compared to the rental income that they receive.
“The management style of the fund can be seen as a little bit more aggressive than other commercial property funds. Its focus on smaller lots sizes allows it to find opportunities overlooked by other investors,” the FE Research team said.
“Investors should be aware that even though the fund has daily liquidity, the asset class is quite illiquid in itself, and exiting the fund might be difficult in times of stress.”
The fund has performed broadly in line with its average peer over five years but has done so with significantly less volatility, as shown in the below graph.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
However, it must be noted that direct property data is not necessarily an accurate reflection of the fund’s risk metrics versus its peers that invest in property securities, given that physical property is not traded on a daily basis.
Threadneedle UK Property has a clean OCF of 0.8 per cent and yields 4.2 per cent.
