Using the Lipper Leaders scoring system to analyse the best-performing funds in the IA Mixed Investment 40-85% Shares sector.

If you are not confident of building your own fund portfolio—or, indeed, if you want a blended ‘core’ of asset classes to build onto with more tactical views—then you may well have cause to look at Mixed Investment funds.

They come in three risk bands, with risk seen as increasing as the equity component increases. Those who saw the value of their bond holdings decimated as inflation spiked may wish to query this view of risk, but that’s how the system works. In addition, there is a Flexible sector, where the fund manager can vary the asset mix, with an equity range of zero to 100%. In practice, Flexible is structurally higher in equities than the highest equity band, but that is another story.

This—the most equity heavy of the mixed investment classifications—is by far the most popular with investors. Over one, three, and five years, the 0-35% and 20-60% Shares classifications have consistently suffered redemptions, while 40-85% has been in the black over each time period.

Which is a tad surprising. Intuitively, you would expect flows for these three sectors to run broadly in tandem. Mixed Investment (MI) clients are grouped by risk tolerance, but there’s nothing to suggest that risk-averse investors are pulling money from funds while their more risk-tolerant peers are ploughing it in. So, what’s happening?

Two possible, and potentially overlapping, explanations seem most likely. First, and more prosaically, it’s possible that those with greater exposure to bonds will have been scarred by the fixed income explosion around 2022, and are pulling money out of bond-heavy MI funds. Possible, but that effect will likely have tailed off by now, whereas latest net flows over 12 months indicate it’s still going strong.

The other is that, in the decade plus following the Global Financial Crisis when rates were close to zero, investors used MI funds as a bond proxy, with a fixed income-like profile but with an equity kicker. This wouldn’t apply so much to 40-85% Shares funds, as you’d then be getting mainly kicker—all tequila and no lager, for the bon vivants amongst you. When rates went back up in 2022, bond yields followed in their wake, so this trend reversed, to the detriment of conservative and balanced MI funds. That, at least, seems to be the most plausible explanation. If you have a better one, I’m all ears.

That tilt towards equity has had its benefits, as returns rise in line with equity level across the three MI classifications, over one, three and five years, with 40-85% outperforming 0-35% by almost 18 percentage points over the latter. That return profile can never be a given, of course: equity valuations are at historic highs, and the fall, when it comes, may be every bit as precipitous and more as were the bond falls of 2022. But for now, at least, the attractions of the classification are apparent.

What’s interesting, however, is that while there is a clear relationship between the three sectors’ equity weighting and returns, this isn’t so apparent within the classification. The correlation between current equity weighting and 12-month performance is positive, but too low to be particularly significant—indeed, it’s lower than when we last looked at the sector a year ago. In short, simply buying into the most equity-heavy fund will not have delivered you the best results.

Orbis OEIC Global Balanced Fund Standard—first placed over three years—is a case in point. Its equity exposure would position it well down the table.  Nevertheless, it’s well ahead of the pack over three years. It has the highest Consistent Return score of 5—as, indeed, do four others on the table.

Table 1: Top-Performing Mixed Investment 40-85% Shares Funds Over Three Years (with a minimum five-year history)

All data as of July 31, 2024; Calculations in GBP

Source: LSEG Lipper

This article first appeared in the September edition of Moneyfacts (p15)