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Mixed and total return funds sector review – our outlook for bonds and shares

We look at how different markets are coping with coronavirus, how mixed investment and total return sector funds have performed and share our outlook for bonds and shares.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

It’s been over a year since the coronavirus crisis emerged and the first lockdowns around the world started, bringing economies and stock markets to a grinding halt. In 2020 the world economy shrank by an estimated 3.5%, with advanced economies contracting more than developing economies.

The UK and the Eurozone area saw some of the worst disruption to their economies as governments took strict measures to control high infection rates.

UK gross domestic product (GDP) is estimated to have fallen by 9.8% in 2020, the largest yearly fall on record. Perhaps unsurprisingly, the second quarter of 2020 was the UK’s worst on record. But the following quarter was its strongest quarterly GDP growth ever recorded. This had a lot to do with the lifting of the first lockdown, as well as a range of government support measures bolstering the economy.

Economic shocks like this can have different effects on bonds, compared with shares. In the initial uncertainty, lots of investors sell riskier bonds and shares, and flock towards ‘safer’ assets, like the highest rated (AAA) government bonds, pushing up their prices. As confidence in the outlook for the economy comes back, investors are willing to take more risks and the prices of riskier bonds and shares tend to recover.

This process happened unusually quickly in 2020 – largely thanks to a coordinated policy response to the pandemic. Governments around the world launched huge stimulus packages to help boost the economy. Central banks cut interest rates (making borrowing cheaper), provided financing to companies and injected liquidity into markets by purchasing bonds.

Initial panic and uncertainty in February and March soon gave way to relief for investors when policymakers stepped in to provide these backstops. It seemed lots of investors looked past the ongoing disruption still happening in economies, calming the volatility and leading to a ‘v-shaped’ recovery rally in shares.

How have different markets performed in the past 12 months?

Past performance isn’t a guide to future returns. Source: *Lipper IM, to 31/03/2021

Annual percentage growth
Mar 16 -
Mar 17
Mar 17 -
Mar 18
Mar 18 -
Mar 19
Mar 19 -
Mar 20
Mar 20 -
Mar 21
FTSE All-Share 22.0% 1.2% 6.4% -18.5% 26.7%
FTSE All World 33.1% 2.9% 10.7% -6.2% 39.6%
IA Global Bonds 12.1% -1.0% 3.9% 1.2% 5.4%

Past performance isn’t a guide to future returns. Source: Lipper IM, to 31/03/2021

After falling 16.1% in the first quarter of 2020, global shares returned an impressive 39.9%* in the next 12 months. The past year’s share rally hasn’t been even, though. UK shares returned 26.7%* and haven’t risen from the lows of March 2020 as much as in the US – home to lots of large, tech and growth companies – where shares have gone on to all-time highs.

Companies sheltered from – or beneficiaries of – the pandemic were initially the strongest performers. Those seen as coronavirus ‘losers’, in cyclical sectors (ones that rely on a strong economy to do well) like financials, oil & gas, travel and leisure, lagged well behind.

This changed dramatically in November 2020. Covid vaccines were announced and began to be rolled out, giving grounds for optimism in a recovery in the economy, while uncertainty over the US elections was resolved with Joe Biden’s win. As a result, the sectors hardest hit by the pandemic received a significant boost. This shift in the market benefited value companies, ending the growth style's extended streak of outperformance.

Meanwhile, the IA Global Bonds sector returned 5.4%* over the past year. Global bonds provided a relative cushion when shares fell in early 2020, but have since lagged. In the first quarter of 2021, returns on global bonds turned negative due to concerns over an increase in inflation. Bond values come under pressure when interest rates rise, and bond markets have factored in a higher probability of interest rate hikes if inflation returns.

The outlook for bonds and shares in diversified portfolios

Low interest rates over the past decade have underpinned higher prices for both shares and bonds. But with seemingly little room for rates to fall any further, this tailwind could reverse course.

At the same time that the level of yield offered by bonds has fallen, lots of bond issuers have issued longer-dated bonds. That’s to lock in low interest rates on their borrowing for as long as possible. The result is increased duration risk – by duration risk we mean how sensitive a bond’s price is to changes in interest rates. That means even small rises in interest rates can cause bonds to lose value.

Rising interest rates can also put pressure on shares. A common way to value companies is by taking the present value of future cash flows. This method considers the cash flows expected in the future and discounts them back to today. In this calculation, the interest rate is often used as the discount rate. And the higher the discount rate, the less future cash flows are worth and the lower the value the investment has today.

But if rates are rising because activity in the economy is picking up, that’s good news and can benefit a range of different types of investment and sectors.

So how should investors be thinking about bonds and shares?

Traditionally while shares are expected to provide most of the growth in a portfolio, bonds also offer diversification and can also offer income. Diversification comes from the tendency for bonds to behave differently to shares, for example by gaining in value when shares fall in value.

While bonds and shares have tended to perform differently in the past, this relationship hasn’t always held true and might not always continue. If low yields suggest that bonds appear expensive, this could mean they have less potential to provide positive returns when shares suffer losses.

But investing in bonds should still help to protect a portfolio in times when shares fall, and to help reduce the ups and downs, compared to only investing in shares. As ever, it’s important to hold a mix of different types of investments across different sectors and countries. That way you could always have something doing well.

This article isn’t personal advice. If you’re not sure whether an investment is right for you, please ask for financial advice. Investments can rise as well as fall in value so you could get back less than you invest.

How have mixed and total return funds performed over the past year?

Past performance isn’t a guide to future returns. Source: *Lipper IM, to 31/03/2021

Annual percentage growth
Mar 16 -
Mar 17
Mar 17 -
Mar 18
Mar 18 -
Mar 19
Mar 19 -
Mar 20
Mar 20 -
Mar 21
IA Flexible Investment 19.4% 2.4% 3.4% -8.3% 29.3%
IA Mixed Investment 0-35% Shares 9.9% 0.4% 2.5% -3.7% 12.1%
IA Mixed Investment 20-60% Shares 13.2% 0.8% 2.9% -7.2% 20.3%
IA Mixed Investment 40-85% Shares 17.6% 1.6% 4.3% -8.0% 26.6%
IA Targeted Absolute Return 3.5% 1.7% -0.8% -3.4% 10.9%

Past performance isn’t a guide to future returns. Source: Lipper IM, to 31/03/2021

Over the past year, all mixed asset sectors produced positive returns. As shares grew a lot more than bonds, the sectors with more invested in shares delivered the highest returns.

The Flexible sector produced the highest return of 29.3%*. It contains funds, like Troy Trojan and Pyrford Global Total Return, that are more defensive with less invested in shares. But on the whole the Flexible sector has the highest allocation to shares, with some funds investing up to 100% in shares.

The Targeted Absolute Return (TAR) sector delivered the lowest return of 10.9%*. It contains funds that aim to deliver positive returns whether markets are rising or falling, usually above a hurdle like inflation. They normally invest in a mix of assets including shares, bonds, commodities and currencies. They could provide modest growth, but are unlikely to keep up with stock markets when they rise quickly.

We think some of the funds in this sector can add value and deliver on their objectives, although many have failed to live up to expectations. We generally prefer TAR funds that keep things simpler in their approach, don't have too many decision-makers involved in the portfolio, and which have been consistent in their process over time.

Over the long term, investing more in shares is expected to better investors’ chances of growing their investment. Because shares can fall in value by more than most types of bonds, this can also lead to greater losses. Shares also tend to be more volatile than bonds, meaning that their prices fluctuate more.

Over the long term, investors have been compensated for this extra risk through higher returns – the equity risk premium – though past performance isn’t a guide to future returns. So investors with a longer investment horizon, who are happy to take more risk, typically look to invest in funds with a higher proportion of shares – like those in the 40-85% shares category.

Funds in the Mixed and TAR sectors offer a broad range of choices whether your objective is growth, capital preservation, income or a combination of these goals. While the sector a fund is in can be a guide, two funds in the same sector could have very different levels of risk, depending on their strategy and what they’re invested in. That’s why it's always important to consider any fund’s objectives and risks.

How have funds on the Wealth Shortlist performed?

Our Wealth Shortlist funds have delivered differing levels of returns over the past 12 months. They have different approaches and objectives and we wouldn’t expect them to perform in the same way.

Remember 12 months is a short time frame when looking at how an investment has done though. Investments should be held as part of a diversified portfolio for the long term, and by long term we mean at least five years.

Baillie Gifford Managed was the best performing fund in the Mixed Investments 40-85% Shares sector over the last 12 months. It returned 46.4% compared to the sector average of 26.6%.

The fund benefited from being in the right sectors, but also from successful stock-picking. Key North American shareholdings including Tesla and Shopify contributed strongly, particularly in 2020. The managers acknowledge that recent performance has been unusually strong, and we don’t think annual returns of this magnitude should be expected going forward. Past performance is not a guide to the future.

The worst performing Wealth Shortlist fund in these sectors was Pyrford Global Total Return, which returned 8.7%. This fund invests much less in shares than many in the Flexible sector, aiming to deliver a return above inflation along with low volatility and minimal losses.

Tony Cousins and his team added to shares in March 2020 but continued to take less risk than many of their peers. Cushioning against market falls is one of Pyrford’s top priorities and the team believes the current environment warrants a cautious stance.

BNY Mellon Real Return produced a return of 19.3%, well ahead of the Targeted Absolute Return sector average of 10.9%. The fund is managed by Suzanne Hutchins, Aron Pataki and Andy Warwick, and a well-resourced team of analysts. After the heavy market falls in the first quarter of 2020, they increased the amount invested in shares and corporate bonds, benefiting performance.

Here’s how some of our Wealth Shortlist funds in these sectors have done. For more details on each fund and its risks, please see the links to their factsheets and key investor information below.

Investing in these funds isn't right for everyone. Investors should only invest if the fund's objectives are aligned with their own, and there's a specific need for the type of investment being made. Investors should understand the specific risks of a fund before they invest, and make sure any new investment forms part of a diversified portfolio.

Mixed Investment 40-85% Shares

Annual percentage growth
Mar 16 -
Mar 17
Mar 17 -
Mar 18
Mar 18 -
Mar 19
Mar 19 -
Mar 20
Mar 20 -
Mar 21
Baillie Gifford Managed 22.0% 6.3% 8.4% 0.2% 46.4%
IA Mixed Investment 40-85% Shares 17.6% 1.6% 4.3% -8.0% 26.6%

Past performance isn’t a guide to future returns. Source: Lipper IM, to 31/03/2021

FIND OUT MORE ABOUT BAILLIE GIFFORD MANAGED INCLUDING CHARGES

BAILLIE GIFFORD MANAGED KEY INVESTOR INFORMATION

Flexible Investment

Annual percentage growth
Mar 16 -
Mar 17
Mar 17 -
Mar 18
Mar 18 -
Mar 19
Mar 19 -
Mar 20
Mar 20 -
Mar 21
Pyrford Global Total Return 8.9% -2.4% 3.4% -2.4% 8.7%
IA Flexible Investment 19.4% 2.4% 3.4% -8.3% 29.3%

Past performance isn’t a guide to future returns. Source: Lipper IM, to 31/03/2021

FIND OUT MORE ABOUT PYRFORD GLOBAL TOTAL RETURN INCLUDING CHARGES

PYRFORD GLOBAL TOTAL RETURN KEY INVESTOR INFORMATION

Targeted Absolute Return

Annual percentage growth
Mar 16 -
Mar 17
Mar 17 -
Mar 18
Mar 18 -
Mar 19
Mar 19 -
Mar 20
Mar 20 -
Mar 21
BNY Mellon Real Return 2.2% -2.2% 7.0% -2.2% 19.3%
IA Targeted Absolute Return 3.5% 1.7% -0.8% -3.4% 10.9%

Past performance isn’t a guide to future returns. Source: Lipper IM, to 31/03/2021

FIND OUT MORE ABOUT BNY MELLON REAL RETURN INCLUDING CHARGES

BNY MELLON REAL RETURN KEY INVESTOR INFORMATION

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Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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