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Investors have increased their exposure to funds with more flexible mandates – as well as those trying to ease the burden of volatility – over the past five years.
Billions of pounds have been invested in the IA Volatility Managed and IA Flexible Investment sectors, according to our analysis of Investment Association (IA) data*.
Funds under management in the IA Volatility Managed sector rocketed 120% from £26.6bn in the summer of 2018 to £58.6bn in June 2023*. Those in the IA Flexible Investment sector, meanwhile, rose £3.4bn to £32.5bn*.
But what are the main aims of the portfolios in these sectors – and which funds are worth a look for investors wanting something a little different?
Let’s start with the rarely discussed IA Volatility Managed sector, which is for funds whose objectives are to manage returns within specific ‘volatility’ parameters.
The best definition of volatility is a type of risk. It’s the measure of the various ups and downs in performance that are experienced by a fund. Volatility also equals uncertainty. The higher the volatility of a particular investment, the more unpredictable the level of returns.
When the economic backdrop is challenging, as it has been over the past year, more investors are likely to be drawn to such sectors.
This helps explain why it was the second best seller in June 2023, with net retail sales of £316m, according to IA figures*. It only trailed the £504m that cautious investors put into IA UK Gilts*.
If you’re interested in the volatility managed sector, then a fund that’s worth considering is the Rathbone Strategic Growth Portfolio. Its stated aim is to deliver a greater total return than the Consumer Price Index (CPI), which is a favoured measure of inflation, plus 3% over rolling five year periods.
This multi-asset fund, which is managed by David Coombs and his team, is part of the new breed of portfolios that target risk and then look to maximise returns. As the managers have an outcome-focused approach, they have complete flexibility over where to invest in order to achieve their overall goals. Part of its process is focusing on risk and correlation of assets. This requires a disciplined asset allocation framework and forward-looking predictions of risk and return.
According to the most recent factsheet, the fund has exposure to a broad spread of assets with equities accounting for the lion’s share with 64%**. It’s followed by conventional government bonds with almost 14%, cash/equivalents of 8%, and 7% in alternative investment strategies**. There are also corporate bonds, commodities, emerging market debt and private equity**.
Funds in this sector contain a variety of investments, although the manager at the helm has significant flexibility over where the money is placed. This freedom means there aren’t any minimum or maximum limits as far as investments in company shares are concerned. Therefore, high allocations are allowed. Similarly, there aren’t any fixed income or cash requirements to consider. This gives the manager – or managers – plenty of scope to chart their own investment path.
There are a couple of portfolios that we like in the IA Flexible Investment sector, and both are multi manager funds. This means they invest in other funds, rather than individual assets.
Our first suggestion is the TB Wise Multi-Asset Growth fund that’s managed by Vincent Ropers and Philip Matthews. Its aim is to provide capital growth over rolling five year periods that’s in excess of the Cboe UK All Companies Index – and in line (or in excess of) the Consumer Price Index. We like the team’s straightforward process and focus on managers with a simple, yet disciplined investment process.
According to the fund’s latest update, top contributors to performance have been found in UK equities, with value and smaller companies biases clawing back recent underperformance. “The fund also benefitted from the rebound in China, mainly through Fidelity China Special Situations, but also via our broader emerging markets exposure,” it added. As far as broad asset allocation is concerned, the fund currently has 58.1% in equities and 28.9% in alternatives, with 8.4% in fixed interest and 2.1% in property***.
Our second suggestion is Jupiter Merlin Growth, which is a high conviction, multi manager fund of funds run by the Jupiter Independent funds team that’s headed up by the experienced John Chatfeild-Roberts. The stated aim is to provide a return, through a combination of capital growth and income, over the long term. As usual, this is classed as being at least five years.
We like the Jupiter team’s simple process and the fact that it shares our bias towards fund managers who are resilient in tough times. The team also backs underlying managers with conviction.
It then has a further 23.9% in UK equity funds, such as Jupiter UK Special Situations, and Man GLG UK Income**. The fund also has exposure – albeit substantially less than the previous two regions – to areas such as Japanese equities and US equities**.
*Source: The Investment Association, June 2018-2023
**Source: fund factsheet, 30 June 2023
***Source: fund factsheet, 31 July 2023
Photo by Pawel Czerwinski on Unsplash