Funds in the Mixed Investment sectors blend shares and bonds, while some also hold alternative investments with the aim to boost returns, or offer a degree of shelter when markets fall. They encompass a wide variety of strategies from the cautious to the more adventurous.
Funds in the Flexible Investment sector can invest up to 100% in shares or invest a large proportion in bonds or cash. Funds in the Mixed Investment 40-85% Shares sector invest in bonds and shares, but the allocation to shares must be between 40% and 85%. In the Mixed Investment 20-60% Shares sector funds are likely to have a higher allocation to corporate bonds than the two sectors mentioned previously, and the shares element can be between 20% and 60%. The Mixed Investment 0-35% Shares sector is home to funds that can only hold up to 35% in shares, and are therefore likely to hold the largest weighting in bonds.
The Targeted Absolute Return sector differs in that funds actively use strategies to try and minimise the impact of falling stock markets. This means they can perform quite differently from more traditional funds.
- Global economic and political events continued to dominate news headlines over the year to 31 July 2017. Donald Trump’s election as US President was unexpected by many investors, while the outlook for the UK remains uncertain in light of the Brexit negotiations. These events have caused short-term bouts of market volatility, yet all major global stock markets posted strong returns over the course of the year. In the bond markets, global high yield and emerging market bonds were particularly strong. In contrast, UK government bonds fell in value.
- In this environment, mixed-asset funds generally performed well. Those positioned more aggressively and with greater exposure to shares tended to deliver greater gains. Returns from funds in the targeted absolute return sector were more muted given the more conservative nature of these funds, although they generally did a good job of sheltering investors during periods of heightened stock market volatility. This is not a guide to how they will perform in future.
- Most of the issues that worried investors over the past year are likely to remain with us for some time, but this does not mean stock markets cannot go on to perform well. Bonds and other assets also provide diversification and we expect funds in these sectors to remain popular with investors who don’t necessarily want 100% exposure to the stock market.
Mixed Investment / Absolute Return - one year performance
Past performance is not a guide to future returns. Source: Lipper IM to 31/07/2017.
|Annual percentage growth|
| Jul 12 -
| Jul 13 -
| Jul 14 -
| Jul 15 -
| Jul 16 -
|IA Targeted Absolute Return||6.5||3.3||4.4||0||3.5|
|IA Mixed Investment 0-35 Shares||6||2.9||3.7||6||5.1|
|IA Mixed Investment 20-60 Shares||11.1||4||4.9||5.7||8.3|
|IA Mixed Investment 40-85 Shares||17||3.9||7||6.7||11.7|
|IA Flexible Investment||18.1||4||7||6.4||13.9|
Past performance is not a guide to future returns. Source: Lipper IM to 31/07/2017
Our view on the Mixed Investment / Absolute Return sectors
Mixed Investment – funds in these sectors are useful for investors who know roughly how much stock market risk they are willing to take and who prefer a balanced, diversified portfolio looked after by a professional fund manager. More cautious investors tend to be drawn to the Mixed Investment 0-35% Shares and 20-60% Shares sectors, while funds in the Flexible and 40-85% Shares sectors tend to attract more adventurous investors.
It is notoriously difficult to consistently perform well by aggressively shifting a portfolio around and switching between different asset classes on a regular basis. We therefore prefer fund managers who take a long-term view, but have demonstrated an ability to add value by varying exposure to different assets, industries and companies when the time is right. Few have done so over the long term and the Wealth 150+ highlights those we regard highly.
Absolute Return - this sector contains a mix of funds, including those focused on the UK, Europe, global equities, bonds and alternative assets. Many share similar objectives, such as the aim to achieve positive returns in a variety of market conditions, but they go about achieving this in very different ways. Each fund in the sector needs to be considered on its individual merits and comparisons between funds are not always valid.
We tend to prefer ‘Total Return’ funds over Absolute Return funds. Total Return funds (such as Newton Real Return or Pyrford Global Total Return) tend to seek, but don’t guarantee, positive returns over the medium-to-long-term, and aim to capture some stock market upside while also seeking to offer some shelter in falling markets. Many aim to achieve their objective by investing in a combination of assets including shares; bonds; cash; commodities; and currencies.
Please remember past performance is not a guide to future returns. Where no data is shown, figures are not available. This information is provided to help you choose your own investments, remember they can fall as well as rise in value so you may not get back the original amount invested.
The flexibility afforded to funds in the mixed investment and absolute return sectors means performance will vary widely, even between funds in the same sector.
Over the past five years both equity and bond markets have performed well overall, and investments in these sectors have achieved respectable returns. Funds with higher exposure to shares and those where the managers have been prepared to take on more risk have been rewarded on the whole, although this is not a guide to how they will perform in future.
Sector performance over 5 years
Past performance is not a guide to the future. Source: Lipper IM to 31/07/2017
Over the past 12 months Asian and emerging markets performed strongly, although they stumbled following Donald Trump’s election as US President in November amid fears his protectionist policies could hurt the region’s exporters. Returns from the European stock markets were almost as strong, helped by an improvement in investor sentiment towards the region and belief the Eurozone’s recovery is strengthening. The UK stock market delivered a weaker, yet still attractive, return and domestically-focused small and medium-sized companies outperformed their larger counterparts despite ongoing concerns over the potential implications of the UK’s exit from the EU.
In terms of broad investment styles, managers who focus on undervalued and out-of-favour businesses struggled for several years prior to 2016 as investors preferred the perceived safety of companies capable of stable growth and with more certainty over their earnings. In the latter of half of 2016 this trend reversed, but the tables turned once more during the first half of 2017.
Bond markets delivered mixed results over the year. Global high yield bonds performed strongly as investors continued to appreciate the relatively higher levels of income on offer in a low interest rate world. UK corporate bonds delivered more modest returns and UK government bonds fell in value over the period, although UK inflation-linked government bonds delivered a positive return, albeit with much greater levels of volatility.
Looking ahead, we believe government bonds offer diversification benefits, but with yields still at historic lows we believe there are opportunities to deliver better returns elsewhere. Corporate bonds, including higher-risk high-yield bonds, offer acceptable yields for the risks being taken, in our view, and remain useful for income-seeking investors and those who don’t want 100% exposure to shares. Yields are variable, not guaranteed and not a reliable indicator of future income.
We continue to believe stock markets will deliver good returns for investors able to take a long-term view. Japan is home to one of the most attractively-valued stock markets, according to our analysis. Asian and emerging markets also look good value, although they are higher risk. Other developed stock markets look reasonable value with the arguable exception of the US, which we believe looks overvalued following a strong recovery from the global financial crisis.
Our favourite funds in the sector
Some of these funds have the ability to invest in emerging markets, smaller companies, high yield bonds and derivatives each of which increase risk. Some operate concentrated portfolios which is a higher risk approach. For more information, please refer to the Key Investor Information Document for the specific fund. Comments are correct as at August 2017. Remember all investments can fall as well as rise in value so investors could get back less than they invest. Past performance should not be seen as guide to future returns.
Other funds in the sector
To view a full list of our favourite funds within the sector, visit the Wealth 150+.
Source for performance figures: Financial Express
Mixed Investment 40-85% Shares. A global portfolio of shares, bonds and cash. An experienced, well-resourced team, which uses a collegiate approach, is one of the main attractions of this fund.
A higher allocation to shares and a focus on companies perceived to have good growth prospects has worked well recently and the fund has performed strongly over the past year. Typically we expect the high exposure to shares to help performance when stock markets are rising, but hinder it when they are falling. The fund is currently biased towards the shares of UK and US companies, and also has a higher-than-average allocation to cash which can be put to good use when more attractive opportunities arise. Please note this fund holds shares in Hargreaves Lansdown plc.
Targeted Absolute Return. A flexible fund managed by an experienced team who allocate capital to multiple asset classes including shares, bonds and cash. The fund aims to produce cash-beating returns over time, while also sheltering investors' capital during difficult periods.
The team at Newton have long held a cautious view of the world and the fund has remained conservatively positioned for several years. The equity portion is biased to more defensive companies with stable earnings. This held back performance in the latter half of 2016 as investors favoured more economically-sensitive companies. However, this positioning has proven more beneficial so far this year. A number of other investments that held back returns towards the end of last year, including US government bonds and gold mining companies, also helped in the early part of this year. In our view, this fund comes into its own when markets hit a rough patch and we feel it represents a good choice for the core of a conservative portfolio.
Mixed Investment 40-85% Shares. This fund predominantly invests in shares, bonds and cash and gains exposure to these assets through individual Schroders funds. It provides access to a number of the group's highly-regarded fund managers.
Schroder's asset allocation team decides on how much of the fund should be exposed to different asset classes, based on their economic views, and subsequently invests in a carefully-selected range of the group’s own funds. The fund is currently biased to developed stock markets, including the UK and Europe, but also invests in higher-risk emerging markets shares as well as government and corporate bonds. It has delivered modest outperformance of its peers over the past year and also over the longer term. We like that this fund offers exposure to a broad spread of assets at low cost.
Flexible Investment. Crispin Odey adopts a high-conviction, contrarian investment approach, meaning this fund tends to be invested quite differently to its peers. In addition to global shares, the fund invests in bonds, commodities, and cash.
The fund has underperformed the broader global stock market over the past year. The manager’s cautious outlook and relatively high levels of cash within the fund has held back returns during a time when global stock and bond markets have performed strongly. Crispin Odey’s views often differ from the consensus and we would therefore expect the fund to experience shorter-term periods of underperformance. Over the longer term, however, the results have been stronger and we maintain our conviction in the manager. We feel this fund could provide diversification to a wider investment portfolio.
Flexible Investment. Sebastian Lyon aims to shelter investors’ capital during tough market conditions and grow wealth over the longer term by investing in the right mix of assets for the prevailing economic climate.
Sebastian Lyon is cautious in his outlook for global stock markets and believes the share prices of many companies are overvalued. He continues to invest in a combination of what he believes to be the highest-quality UK and global shares, physical gold, US and UK index-linked bonds, and cash. The fund underperformed the broader UK stock market over the past year. However, given the defensive nature of the portfolio, we would typically expect the fund to lag global stock markets when share prices are rising rapidly. On the other hand, we expect the fund to offer some shelter to investors’ capital during weaker or more turbulent times for the stock market.
Mixed Investment 0-35% Shares. This fund is typically more conservatively positioned than many other mixed-asset funds given its exposure to shares is capped at 35% of the portfolio.
Alastair Gunn manages the shares portion of this portfolio, while Rhys Petheram manages the bond component. The fund has typically invested more in shares than many of its peers and this has helped performance in recent years given the strength of global stock markets compared with their fixed-interest counterparts. It has performed in line with the average fund in the sector over the past year, however. We view Alastair Gunn and Rhys Petheram as capable fund managers and view the fund as a sensible option in the IA Mixed Investment 0-35% Sector. That said, given the managers have a shorter track record than our favoured multi-asset investors, we would like to monitor their performance for a prolonged period and also see how they fare during a significant market downturn.
Mixed Investment 20-60% Shares. A diversified portfolio of shares, bonds and cash. Alastair Mundy is a contrarian investor – he seeks out-of-favour companies with the potential to recover. We view this as a slightly higher-risk option compared with some similar funds.
The manager’s contrarian approach and a focus on undervalued companies had not been in favour for several years prior to 2016, but came to fruition and boosted performance in the second half of last year. The trend reversed again in the early months of 2017, which means overall the fund has performed in line with the sector average over the past year. This fund does not currently feature on the Wealth 150 list of our favourite funds across the major sectors. That said, we view Alastair Mundy as an experienced investor and believe he has the ability to add value for long-term, patient investors.