Portfolio Adviser • October 2016 • Fund Trends

Multi-asset funds are coming into their own as macro and market uncertainty makes investors think more about diversity

W Editor, FE Trustnet ith the UK voting to leave the European Union, global growth remaining lacklustre and valuations in both equity and bond markets stretched, it is only natural that investors look for funds with a focus on downside protection.

Investment Association (IA) data shows retail investors have been flocking to more defensive sectors. IA Targeted Absolute Return was the best-selling sector in July taking in £464m, followed by IA Sterling Corporate Bond, IA Short Term Money Market, IA Sterling Strategic Bond and IA Global Bonds.

Multi-asset funds also remained popular, amassing net retail inflows of £195m. As a point of comparison, equity funds were hit by a net retail outflow of £2.2bn – with £1bn of this coming from UK equity funds – while £792m was redeemed from property funds.

Multi-asset funds give investors diversified exposure to financial markets, and many highlight how this can help protect capital. But which funds from the four IA sectors – Flexible Investment, Mixed Investment 40%-85% Shares, Mixed Investment 20%-60% Shares and Mixed Investment 0%- 35% Shares – have the best track record?

To find out, we looked at the funds in each of these sectors on four metrics – total returns, downside capture against the FTSE All- Share, maximum drawdown and annualised volatility – between 1 Jan ’08 and 31 Aug ’16.

Applying these filters shows a handful of funds have managed to stay in the top quartile of their respective multi-asset sectors on all four metrics over the eight and a half years in question.

First up, it is important to note the average multi-asset fund has failed to beat the FTSE All-Share over this timeframe. IA Mixed Investment 40%-85% Shares – formerly known as the Balanced Managed sector – has come closest but, as the chart opposite shows, the average fund is still 5.8 percentage points behind the index.

However, every fund that is included in this article has outperformed the FTSE All- Share. In the IA Flexible Investment sector, the funds that are in the top quartile for each of the four metrics are CF Ruffer Equity & General, Jupiter Merlin Growth Portfolio, Carmignac Patrimoine and Troy Trojan.

Table 1 shows the top-quartile funds’ numbers on each of these counts and is ranked by total return. Alex Grispos’ £164.5m CF Ruffer Equity & General holds the top spot after making 87.3% since 1 January 2008. It also has the lowest maximum drawdown of the four funds here, as well as the second lowest of the entire sector, after losing just 8.9% in the financial crisis.

Like other Ruffer funds, this one tends to be cautiously positioned and is keen to avoid parts of the market that the manager considers expensive. At the moment, close to one-third of the portfolio is in cash, which has hampered performance in recent years, and it favours instruments that provide insurance against falling equity markets.

In his latest update, Grispos says: “Even though we believe the current environment is fragile and probably unsustainable, it has been a challenge for us. Our protection is unlikely to kick in during short market drops, nor does it give us sufficient opportunity to use our cash ammunition, which has happened a few times since 2014.

“It is when the markets decline over a period of time, for example 2008/9 and 2011, we can find opportunities to gradually deploy our cash that will deliver the greatest potential returns.”

Troy Trojan, managed by Sebastian Lyon, is the IA Flexible Investment member that tops this research’s table when it comes to the other two metrics: annualised volatility and downside capture against the FTSE All- Share. This is another fund that is run by an asset management house known for its focus on capital preservation.

Lyon has built his portfolio around four ‘pillars’ of blue-chip equities, index-linked bonds, gold and cash that are designed to enhance capital preservation. Valuation is central to the fund’s investment process and when buying equities, the manager focuses on their attractiveness relative to historical valuations rather than other asset classes.

While Lyon aims for consistent positive returns, he places capital preservation at the top of his list of priorities. This means he tends to favour non-cyclical equity sectors such as pharmaceuticals, food, tobacco and software. He maintains around 10% in gold and is not afraid to stockpile cash, which is currently around 28% of assets.

Turning to the IA Mixed Investment 40%-85% Shares sector, seven funds have made a top-quartile return for each metric (see Table 2).

McInroy & Wood Balanced has made the highest total return, gaining 108.4% between 1 January 2008 and 31 August 2016. The £582.9m fund places an equal emphasis on capital growth and income generation. It invests directly in any geographical area and economic sector but avoids tobacco companies or those directly involved in the development of arms due to ethical principles.

Claire Titmarsh and Simon Mountain’s CF Ruffer European fund has the sector’s lowest maximum drawdown and downside capture against the FTSE All-Share, which might not be too surprising as it focuses on European equities with some bonds. It is managed with the same cautious mindset as other Ruffer funds.

That said, the fund does offer some exposure to UK assets, and 25% of the portfolio is in the UK, with 14% in index-linked gilts and holds a number of British companies such as intellectual property business commercialisation firm IP Group.

When it comes to annualised volatility, the Fidelity Moneybuilder Balanced fund leads the pack.

The fund is managed by the highly respected team of Ian Spreadbury and Michael Clark. Both managers are known for their defensive approach – Spreadbury tends to hold government bonds and only the corporate debt that he has the most conviction in; clark likes high-quality stocks with sustainable dividends, especially those in non-cyclical sectors.

There are only two funds in the IA Mixed Investment 20%-60% Share sector that sit in the first quartile for total returns, downside capture against the FTSE All-Share, maximum drawdown and annualised volatility over the period in question.

CF Ruffer Total Return has the best scores of the two for each of the four metrics we have looked at. In fact, its 104.4% return is the highest of all the funds in the sector since 1 January 2008.

Managed by David Ballance and Steve Russell, the £3bn fund strives to make positive returns over 12-month periods, with low volatility. In order to do this, Ballance and Russell change the fund’s allocation depending on whether prevailing economic conditions suggest they should be holding ‘greed’ or ‘fear’ assets. Greed assets are typically equities and fear assets include bonds or commodities such as gold.

Summing up their approach, the managers say: “Our aim at Ruffer is always to provide investors with a safe passage through the squalls that frequent financial markets, while all the time keeping an eye open for the hurricanes that from time to time threaten to diminish the value of their savings. In the meantime, we also endeavour to make decent returns when conditions seem less threatening.”

The other top-quartile fund highlighted is Henderson Multi-Manager Distribution, run by Henderson’s dozen-strong multi-asset team. It seeks to make a sustainable level of income with some long-term capital growth through a fund-of-funds approach.

Its underlying holdings include the likes of Artemis Income, Threadneedle UK Monthly Income, Veritas Global Equity Income, Pimco GIS Income and TwentyFour’s Dynamic Bond fund.

In the final – and smallest – multi-asset sector of IA Mixed Investment 0%-35% Shares, only one fund has achieved topdecile numbers for each of the four metrics.

FP Matterley Regular High Income is managed by relative newcomers Chris Ainscough and Jeremy Spain. Prior to this, and for the bulk of the track record we have looked at, the £64.5m portfolio was run by Chris Evans and Chris Harris.

The fund aims for a high income with the potential for capital growth and achieves this through a portfolio of UK bonds, government securities, high-yielding equities and preference shares. Around 56% of the portfolio is currently in corporate bonds, with names such as Motability, Go-Ahead Group, Telecom Italia and British Telecom featuring in its top 10 holdings.

‘ IT IS WHEN THE MARKETS DECLINE WE CAN FIND OPPORTUNITIES TO GRADUALLY DEPLOY OUR CASH THAT WILL DELIVER THE GREATEST POTENTIAL RETURNS’

Multi-asset funds are facing challenges. Bond yields have been falling steadily for 30 years and despite looking like they could not possibly go any lower, they have. Investors seem to be willing to pay a premium for a bond that yields nothing and will give them back at less than they invested. Managers are being forced to take on more risk, both in terms of credit and duration.

With so much intervention from central banks, all assets are becoming increasingly correlated to interest rate movements. The increased risk is that, if interest rates rise faster than expected – or there is an expectation that they will – everything could sell off together.

The reduced liquidity in the bond world has been discussed for some time, along with the risk that investors suddenly take fright. But it was the property sector where this ‘event’ took place in the days after the EU referendum. A number of multi-asset funds were caught up in the trading suspensions.

In trying to do something different and identify less well-known but better funds and assets, capacity can become a problem for the larger multi-asset managers. Often they are the bigger investors in an underlying fund and the multi-asset fund’s flows can significantly affect underlying performance. Or they simply cannot invest as much as they would like.

Multi-asset funds are not immune to the ongoing low-growth environment and there is a temptation to take more risk to keep investors happy. To navigate these difficult waters, you need an experienced and strong multi-asset manager.

BMO, Jupiter, Premier and Schroders all have multiasset ranges and the experience that fits the bill. I also like Rathbone Strategic Growth Portfolio and Church House Tenax Absolute Return Strategies.