Using the Lipper Leaders scoring system to analyse the best-performing funds in the IA Mixed Investment 0-35% Shares sector.
Mixed investment funds offer a (relatively) hassle free way of managing your portfolio asset allocation, with it being done within one fund wrapper. The Investment Association sectors offer four such sectors, each defined by their equity allocation. More equities mean more risk, but the potential for greater return.
For example, over the past 20 years Mixed Investment 40-85% Shares has returned an average of 266%, and its 0-35% Shares sibling, 122%. The quid pro quo is that when markets fall, 0-35% should fall less, which is normally the case. Last year, however, that didn’t happen, with 0-35% down 10.9% and 40-85% down 10.1%.
This is because falling equity markets were combined with rising interest rates, which we warned of at the time. Back in June, my Lipper Research colleague Detlef Glow noted: “the general economic and market environment looks very challenging for the managers of mixed-assets funds”, as “the spreads of corporate bonds have started to widen as the economic situation puts the earnings expectations for a number of companies and some sectors into jeopardy. As a result, corporate and government bonds face losses, which means that the returns from the bond portion of portfolios won’t help to offset the negative returns from the equity portion of a mixed-assets portfolio”.
He concluded “some investors will get a bad surprise when the interest rates increase further”.
Bonds did indeed suffer, with the IA Sterling Corporate Bond (-16.1%) and UK Gilts (-23.8%) sectors posting heavy losses over the year. With the UK All Companies equity sector down 8.8%, the 10.9% loss with a heavy skew to bonds could certainly have been much worse.
Too tight?
Base rates have climbed from 0.1% in December 2021 to 3.5% presently. In its November 2022 forecast, the Office for Budget Responsibility predicted that the base rate would rise to 4.8% in Q3 2023, then falling to 4.5% in Q3 2024. Consultancy Fathom warned that “central banks are more likely to tighten too much – increasing interest rates and implementing QT [quantitative tightening] – than too little in 2023”. If that’s the case, then there is more pain to come as rising rates impact bond portfolio valuations—albeit likely not to the levels they’ve experienced over the past year. In addition, excessive tightening will negatively impact growth, which is bad for equity valuations. So, instead of delivering the negative correlation investors want in an equity and bond portfolio, they will move—and in the wrong way—together.
If…, to quote both Kipling and the Laconians. But, while nothing is certain in investment, warnings from the Fed and OBR regarding the direction of rates do make it a strong likelihood. The optimists’ answer is that growth will prove stronger than expected, the US, UK and Europe will avoid recession and these rises will prove prescient in restraining inflation. In which case, the news is still bad for bonds, but better for equities.
There are a lot of moving parts here. Best for bonds is that the terminal level for rates isn’t as high as predicted, and their holders can bask in the higher yields that 2022 delivered. There’s certainly a signal of bond optimism among asset managers. But, then, they have to be optimistic about something. If this is correct, though, this mixed investment sector could deliver a relatively respectable return. Whether that’s enough to reverse the flows from the lower to higher equity mixed investment sectors seen over recent years is debatable—no one is trading these sectors over a 12 month horizon, it’s the very antithesis of what they’re for. And it’s also clear looking at the long-term return that investors in the sectors with higher equity portions have been well rewarded for that additional risk.
Table 1: Top-Performing Mixed Investment 0-35% Shares Over Three Years (with a minimum five-year history)
All data as of December 31, 2022; Calculations in GBP
Source: Refinitiv Lipper
This article first appeared in the November issue of Moneyfacts, page 13.
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The views expressed are the views of the author and not necessarily those of Refinitiv. This material is provided as market commentary and for educational purposes only and does not constitute investment research or advice. Refinitiv cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided in this publication or from any other source mentioned. Please consult with a qualified professional for financial advice.
