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Seven funds that advisers have backed for cautious investors over the long run

07 February 2017

In the final article of our three-part series, FE Trustnet reveals the AFI Cautious funds that have been included in the index for the longest period of time.

By Gary Jackson,

Editor, FE Trustnet

M&G Optimal Income, Newton Global Income and AXA Framlington UK Select Opportunities are some of the funds that have spent the most amount of time in the AFI Cautious index.

FE’s Adviser Fund Index (AFI), which is based on the funds that a panel of leading UK financial advisers recommends to their clients, has gone through 24 rebalancings since its launch. Funds are split between the AFI Aggressive, Balanced and Cautious portfolios.

Performance of AFI Cautious vs IA Mixed Investment 20%-60% Shares over 10yrs

 

Source: FE Analytics

As the chart above shows, the AFI Cautious portfolio has outperformed its equivalent Investment Association sector (IA Mixed Investment 20%-60% Shares) over the past 10 years with a 49.80 per cent. It’s also beaten the sector over three and five years.

However, the AFI Cautious index has been more volatile than the multi-asset sector and has posted a higher maximum drawdown over the past 10 years. That said, the index has made a higher maximum gain over this period at 22.82 per cent.

In the following article, we find out which current AFI Cautious funds have been members of the index for the longest and look at their performance across the past decade.


M&G Optimal Income

 

Source: FE Analytics

First up is the M&G Optimal Income fund, which is headed up by FE Alpha Manager Richard Woolnough and has recently reached its 10th year. The fund has been included in the last 20 rebalancings of the AFI Cautious index. Over the past decade, the £16bn fund has made a 107.72 per cent total return, which makes it the best performer of its peer group. The fund is managed with risk management in mind and is top quartile for metrics such as annualised volatility, maximum drawdown and Sharpe ratio. Being a member of the IA Sterling Strategic Bond sector, M&G Optimal Income has a flexible approach to fixed income markets and aims to capture the most attractive income stream at any given point in the economic cycle. It currently has more than half of its portfolio in investment grade bonds, with close to 35 per cent in high yield and one-fifth in government bonds; there’s also a 5.3 per cent weighting to equities.


Invesco Perpetual Income

 

Source: FE Analytics

Also featuring in 20 rebalancings of the index is FE Alpha Manager Mark Barnett’s £5.7bn Invesco Perpetual Income fund. This fund, which was managed by Neil Woodford for the bulk of the period in question, was also highlighted when we looked at longstanding members of the AFI Aggressive and AFI Balanced indices. As the chart shows, Invesco Perpetual Income has established a strong track record in outperforming both its current IA UK All Companies sector and the IA UK Equity Income sector, where it used to reside. Barnett take a long-term approach when building the portfolio and aims to offer an attractive total return, rather than focusing on income alone – an approach which was also used by Woodford. However, the potential for dividend growth is one of the most important factors when the manager is deciding if a stock should be held by the fund.


M&G Property Portfolio

 

Source: FE Analytics

Fiona Rowley’s £4bn M&G Property Portfolio has been an AFI Cautious member for the past 21 rebalancings – the same amount of time it has appeared on the AFI Balanced index. Over the past 10 years, the fund has made 5.16 per cent total return, having being hit with losses during the financial crisis and after the Brexit referendum. Rowley has been manager of the fund since 2007 and was joined by deputy manager Justin Upton in 2012; both have spent their entire careers in property investing. The M&G property team prefers properties that are high quality, well located and income generating although a small part of the portfolio is in ‘recovery’ properties that require more intensive management, such as a refurbishment before it can be rented out.


Newton Global Income

 

Source: FE Analytics

Newton Global Income, which has been managed by Nick Clay since December 2015 and had James Harries as manager prior to this, has featured in 21 AFI Cautious rebalancings. Over the past decade, the £5.5bn fund has posted a 161.89 per cent total return, which is the highest in the IA Global Equity Income sector. The portfolio is built around Newton’s thematic approach, with stock selection is guided by a number of overarching macro trends that the group believes will have a meaningful impact on markets. Stocks owned by the fund also have to pay a yield that is 25 per cent higher than the FTSE World index and holdings will be sold if the dividend yield falls below that of the benchmark.


Standard Life Investments Global Index Linked Bond

 

Source: FE Analytics

Appearing in the past 22 iterations of the index is the Standard Life Investments Global Index Linked Bond fund, which has been managed by Adam Skerry and Katy Forbes since the start of 2015; before this, the fund was run by Jonathan Gibbs. The £1.2bn fund has the aim of protecting investors' capital and income from the effects of inflation. Although it has a global remit, it has a high correlation to UK inflation and is seen as a good long-term hedge for UK investors looking to protect against inflation. Its 59.25 per cent total return over the past 10 years puts it in the bottom quartile of the IA Global Bonds peer group, but comparisons between funds are difficult in this sector due to their widely differing aims and approaches. The fund holds an ‘A’ rating from Square Mile, which says that the approach used “is flexible enough to take advantage of the opportunities available in inflation markets, but structured enough to give investors comfort that they will not get any nasty surprises”.


Kames Strategic Bond

 

Source: FE Analytics

The £405m Kames Strategic Bond fund, managed by David Roberts, Philip Milburn and Juan Valenzuela, has made it through 23 rebalancings of the AFI Cautious index. It has the aim of maximising total returns and has the freedom to invest across global debt markets. It has made 55.22 per cent over the past 10 years, narrowly outperforming its average IA Sterling Strategic Bond peer. In terms of current positioning, the managers are mindful that volatility looks set to continue in bond markets and are short duration to protect against sharp interest rate rises. In their latest update, they explained: “Given the stretched level of yields globally and the fears of central bank tapering, further bouts of volatility are almost inevitable and as such, this fund should be well placed to navigate a path through these uncertain times.”


AXA Framlington UK Select Opportunities

 

Source: FE Analytics

The final fund on the list, also with 23 appearances in the AFI Cautious index, is FE Alpha Manager Nigel Thomas’ £3.8bn AXA Framlington UK Select Opportunities fund. It has both its average IA UK All Companies peer and its FTSE All Share benchmark over the past 10 years with a 103 per cent total return. Although the fund has been slightly more volatile than its average peer, it is top quartile in the sector for alpha generation relative to the FTSE All Share and risk-adjusted returns indicated by the Sharpe, Sortino and Treynor ratios. Thomas has more than 30 years of experience and has built a strong track record. He concentrates on companies that have attractive growth prospects, although the manager will not overpay for them. This leads him to companies that generate above average growth in earnings and produce high cash returns on invested capital.


 

Source: FE

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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.