by Dewi John.
Mixed investment funds offer a one-stop-shop, managing your portfolio asset allocation within one fund. The Investment Association sectors provides four such sectors, each defined by their equity allocation. More equities mean more risk, and potentially more return. Flexible Investments Funds are (in theory, at least) the go-anywhere fourth sector: managers can dial their equity exposure up to 100% or down to zero. This maximises opportunity. But then, of course, it also maximises the risk if you call the market wrong.
The reality, however, is a little different. This hit me as I compared the Lipper classification of flexible investment flows (positive over a year) with the IA sector (negative). This made no sense, as one would expect a broad equivalence. Until I compared the funds in the IA sector with their Lipper counterpart. There are 150 funds in the IA sector, but only 42 of them are flexible, according to Lipper classification: 35 of them sterling, four are euro-denominated, and three of them US dollar.
Lipper’s tends to be a purer view, based on our analysis of the fund’s stated goals and what’s in the portfolio. In short, the IA Flexible Investment sector is a real grab bag of styles, asset allocations, and strategies, from absolute return funds to global equity. There’s even one Japanese equity fund in there. The largest constituent part is Lipper’s Mixed Asset GBP Aggressive, with 48 funds.
You might expect Flexible Investment’s average equity exposure to meander around between those of the other three mixed investment classifications, given its moniker. In which case, you would expect wrong. Flexible has had a higher average proportion of equity than the most aggressive mixed investment sector (40%-85% Shares) every calendar year between 2006 and 2022. The average excess is 6.9%. Given the proportion of vehicles that are in effect equity funds with flexible cash weightings, that shouldn’t be a surprise.
In general, this has served investors in the sector well. Average returns for the fix-banded mixed investment sectors ran from -1.83% to -4.12% over the year to 31 May—the greater the equity content, the better the performance. This pattern plays out over three years. Over 12 months, Flexible Investment outperforms the others (with a loss of -1.1%). Flexible has outperformed its other three mixed investment sectors in all but four of the past 16 years. But when equity markets have fallen heavily, such as during the Global Financial Crisis, that has been reversed.
Managers may have held such high equity allocations simply because it has paid to them to: the decade and a half since the GFC has been lacklustre for fixed income, and the asset class was a basket case last year as rising rates hammered bond returns. That’s plausible, but many of the funds in the sector nonetheless have mandates that imply a strategically high equity allocation. Some, as I’ve argued, are essentially no more nor less than equity funds.
So, if you are looking for a genuinely go-anywhere fund in terms of its asset allocation, then simply selecting a fund with relatively strong returns, or even risk-adjusted performance, will likely not prove sufficient: you would need to look at both the fund’s mandate and how it has moved its asset allocation around over time.
This is particularly significant now since if the threat of recession becomes actual this will not be a good environment for equities. If any such recession proves relatively shallow, that may not be enough of a dip to take the shine from Fixed Investment’s relatively better performance. But anything of greater depth and duration may put its flexibility to the test. Judging by 2008 to 2009, on average it may prove more rigid than the name implies.
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