More geographically diverse equity strategies, UK property funds and those focused on volatility are what cautious investors should be adding to portfolios given the current market backdrop, according to a panel of leading financial advisers.
February’s rebalance of the FE Adviser Fund Index (AFI) Cautious portfolio saw an increase in the recommended exposure to IA Global, IA UK Direct Property and IA Volatility Managed funds.
At the same time, advisers reduced exposure to the IA Sterling Strategic Bond sector and some IA Targeted Absolute Return funds.
The FE AFI Aggressive, Balanced and Cautious portfolios are put together by a panel of leading UK financial advisers who each submit a maximum of 10 funds for a specific age group with the assumption that a client is saving for a pension at age 65.
The biggest change following February’s rebalance was a reduction in the recommendations from the IA Sterling Strategic Bond sector.
Changes in FE AFI Cautious allocations
Before the rebalance there was a 16.22 per cent weighting to the peer group but this has declined to 13.62 per cent. It now has lost its place as the largest sector allocation in the FE AFI Cautious portfolio to the IA Targeted Absolute Return peer group.
However, it should be noted that there was also a reduction to absolute return funds in the portfolio, going from 16.02 per cent to 13.81 per cent.
Two IA Sterling Strategic Bond funds have left the portfolio following the rebalance: TwentyFour Dynamic Bond and Kames Strategic Bond, with Jupiter Strategic Bond and Artemis Strategic Bond experiencing significant reductions in allocations.
There were some new additions, however, in Rathbone Strategic Bond, Royal London Sterling Extra Yield Bond, Royal London Short Duration Credit, Invesco Tactical Bond (UK), and M&G UK Inflation Linked Corporate Bond.
In the IA Targeted Absolute Return sector, two strategies were removed including the Absolute Insight fund – a fund of funds – and former adviser favourite Standard Life Investments Global Absolute Return Strategies (GARS), while some saw their allocations reduced.
FE AFI panellist Amelia Sexton, investment manager at advisory firm Holden & Partners, said it is difficult to talk about allocating to the absolute return sector because of the disparate nature of the strategies.
“‘Absolute return’ is a bit of a misnomer because there are many periods when those products don’t generate a relative or absolute return,” she said.
“It is becoming quite difficult, but clearly there is a need for those types of solutions still because when you’re at low interest rates – asides from the US – you can’t really allocate to traditional safe havens of sovereign or corporate debt: You need to look further afield.
“We do use traditional safe havens of property and infrastructure as well but do like to have an allocation to something suitable.”
As such her newest pick for the FE AFI Cautious portfolio – Investec Diversified Income – is found in the IA Mixed Investment 0-35% Shares sector, which she said is “quite unique” in the multi-asset space.
Performance of fund vs sector under manager
Source: FE Analytics
The fund is overseen by veteran investor and Investec co-head of multi-asset John Stopford and invests predominantly in bonds and their related derivatives.
Under Stopford – who joined the fund in July 2012 – it has delivered a total return of 35.49 per cent compared with a 27.28 per cent gain for the average peer.
Sexton said that – although the fund is not marketed as such – it is used in their lower risk portfolios as an absolute return-type solution.
“That is really due to the downside characterises its multi-asset approach really gives us,” she said, noting the separation of assets into three buckets – growth, defensive and uncorrelated – and its ability in limiting drawdown.
“The other thing we like about it is that income – as opposed to capital – growth is the primary component of the returns that it generates,” she said. “This gives it the ability to limit the downside capture of the fund and lends itself well to the absolute return portion of the portfolio.”
As was seen across all FE AFI portfolios, an increased weighting to IA Global funds has emerged as one of the strongest themes of this rebalance. The sector was the best seller of 2018 with net retail sales of £3.9bn, in what was a lacklustre year for the industry.
The popularity of global equity funds increased last year amid concerns over a UK market mired by Brexit negotiations, expectations of the end of the cycle in the US, and slowdowns in Europe and emerging markets.
As such, the portfolio’s exposure rose from just under 6 per cent to 7.9 per cent following the rebalance, with three new funds added – Brown Advisory Global Leaders, Lazard Global Listed Infrastructure Equity and Veritas Global Focus – and no departures.
The other big trend in new allocations was to UK property, with the traditional ‘safe haven’ seeing an upswing in popularity among the panel.
The IA UK Direct Property sector’s representation in the portfolio increased from 4.55 per cent to 6.26 per cent following the rebalance, while the addition of three UK property trusts also boosted exposure.
Four new open-ended property funds were included in the portfolio following the rebalance: Commercial Freehold, Freehold Income Authorised, L&G UK Property Feeder and Threadneedle UK Property Authorised Investment.
Another new addition on a sector level was IA Volatility Managed, whose allocation went from zero to 1.18 per cent after the BMO Universal MAP Cautious was added to the portfolio.
Other new sectors added to the portfolio following the latest rebalancing included the IA Global Emerging Markets Bond, IA Global Emerging Markets and IT Private Equity each with allocations of less than 1 per cent.
Performance of portfolio vs index in 2018
Source: FE Analytics
Last year, the portfolio held up well against the FTSE All Share – a commonly used benchmark for UK investors – with its loss of 4.36 per cent against a fall of 9.47 per cent loss for the domestic market.