Three fund swaps for your portfolio

With the global economic outlook gradually improving now is a good time for investors to start thinking about reshuffling their portfolios.


Suggested swap: M&G High Yield Corporate Bond for M&G Gilt & Fixed Interest Income

"This is really more of an asset allocation call than fund specific as it’s about adding risk to a portfolio and switching out of low risk and into higher risk," said Tim Cockerill, head of collectives research at Rowan Dartington.

"Top of the list has to be switch out of gilts into either high yield or another asset class. Gilts have such low yields that I don’t think they can be sustained. Part of the reason they are low is because of the so-called safe haven status that the UK has acquired. As the economic outlook improves the need for safe havens will reduce and it could result in a sharp move out of UK gilts."

"An improving economic outlook will also raise the prospect of inflationary pressures, an end to QE and the end of very low interest rates. This could still be some way off in reality, but the market anticipates these events and will react long before they happen. Year-to-date gilt funds have been among the poorest performers."

"A move to high yield will, I anticipate, deliver more income and better capital performance if the positive outlook continues to strengthen. As for funds, a typical move might be out of M&G Gilt & Fixed Interest Income into the M&G High Yield Corporate Bond fund. These are both conservatively managed funds and high quality but it’s the type of move that could add value to a portfolio by upping the risk but not too significantly."

Data from FE Analytics shows that the £948m M&G Gilt & Fixed Interest Income fund has returned 13.8 per cent in the last 12 months. The M&G High Yield Corporate Bond fund has returned 2.2 per cent over the same period.


Suggested swap: Newton Real Return for BlackRock UK Absolute Alpha

Chris Spear, managing director at Spear Financial Services, recommends this swap.

"BlackRock UK Absolute Alpha did well when markets were in freefall, but with its popularity came significant inflows of money," he said. "Performance stagnated and 2011 was a very poor year. We know the FSA has its concerns with Absolute Return funds, and the BlackRock fund is definitely one I am moving away from."

Our data shows that BlackRock UK Absolute Alpha returned 6.62 per cent in the darkest days of the financial crisis between credit markets freezing in August 2007 and when the FTSE bottomed out on 1 March 2009. The average Absolute Return fund lost 2.96 per cent during the period.

In the three years since then it has returned 15.15 per cent. Although it has outperformed the sector average, there are plenty of Absolute Return funds that returned more over the period.

"Within the theme of Absolute Return I prefer funds with a sensible approach," Spear continued. "I have been recommending Newton Real Return fund. It has a solid track record and avoids many of the synthetic assets that other Absolute Return funds use."

FE Alpha Manager Iain Stewart’s Newton Real Return fund has returned 27.88 per cent over the last three years and has always been consistently ahead of the sector average.


Suggested swap: Fidelity Multi Asset Strategic for Midas Balanced Income

Spear has been patient with the £219m Midas Balanced Income fund but he now prefers Trevor Greetham’s Fidelity Multi Asset Strategic.

"The Midas Balanced Income fund had all the right credentials. Manager Alan Burrows is experienced and has a track record of managing money for a significant pension scheme. The fund generates a good income and operates a multi-asset strategy. Yet 2008 was an annus horribilis with the fund failing to recover to the same extent that it fell. 2011 also saw a period of significant underperformance. I don't like switching funds for the sake of switching. We all know that managers can have a poor year, but I am now actively making changes."

"As a replacement for the Midas Balanced Income fund I would look at Fidelity Multi Asset Strategic for a non-income multi-asset alternative or Fidelity Multi Asset Income."