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Mixed and total return sector review – a difficult year ahead?

We look at how different markets are coping and recovering from the pandemic, 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.

The global economy grew by 6.1% in 2021, a faster rate than many expected and one of the quickest post-recession recoveries since World War II. This growth mainly reflects rebounds in larger developed nations, which received unprecedented levels of fiscal support (large government spending and lower taxes) and more efficient vaccine roll outs.

It hasn’t been a smooth ride though. Recovery rates have varied across different parts of the world and we’ve now entered 2022 with an arguably weaker outlook.

Parts of the world are beginning to cope better with Covid-19, but infection rates are still rising in other parts of the world, reflecting the difficulties in vaccine availability and slower uptake. These lingering effects are forcing some countries to reimpose restrictions to help curb the spread. This is likely to dampen recovery efforts.

Rising energy prices and supply-side challenges have put pressure on the economic recovery too, pushing inflation in parts of the world to heights not seen in 40 years.

This could continue as the war in Ukraine has exacerbated the imbalance between supply and demand. It’s sparked concerns about the distribution of energy, food and how much we can produce of both. Western sanctions, which aim to cut Russia from the global financial system, will only add to these pressures due to Russia’s significance as an energy exporter.

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

How have stock markets reacted?

2021 was a strong year for most developed share markets. Unprecedented levels of financial support helped propel an economic recovery from the pandemic. We saw a third consecutive year of double-digit growth for global markets and US markets notched up 70 all-time highs over the course of the year.

So far this year though, most major share markets have fallen. The combination of wider economic pressures is leading to rising interest rates and high levels of inflation, sparking fears of a recession, hampering economic growth and denting investor sentiment.

The exception is the FTSE All-Share, which has made a small positive return, buoyed by sectors like banks and oil & gas.

Against the current market backdrop, global growth is likely to slow down. Recent projections suggest it’s expected to fall from 6.1% to 3.6% this year and stay at that level in 2023. The economic slowdown in the US and China could also play a part in this decrease.

The US is tightening its support for the economy, struggling with spiralling wage inflation and grappling with supply issues. China is experiencing slow growth following the zero Covid-19 policy-induced disruptions, stressed property markets and regulatory crackdowns pushed by the government.

Outlook for bonds

2022 presents a challenging backdrop for bond investors. Inflation reduces the value of the cash flows that bonds pay to investors. It can also prompt central banks to increase interest rates, which in turn has tended to push down bond prices but this shouldn’t be seen as a guide to the future.

As inflation is currently rising, central banks are retaliating by increasing rates. Although interest rate rises have been expected for years, it’s the sudden swiftness that’s caused a big decline. Bond markets have been falling as a result and reflect a period of performance not seen in decades, returning -6.36% over the past 12 months*.

It’s going to be a tricky year for central banks as they deal with the lingering impact of the pandemic and higher levels of inflation.

While this presents a tricky backdrop for bonds, yields currently look more attractive. Bonds still play an important role in helping diversify a portfolio, by dampening the ups and downs that come with investing, offering balance, and the potential for income. Remember, yields are variable and not guaranteed.

How have mixed asset and total return funds performed?

Funds that have invested more in shares and less in bonds have seen better returns over the past five years. Funds in the IA Flexible Investment and IA Mixed Investment 40-85% Shares sectors have held up best over this period as they generally invest more in shares.

The past year has been different, with both share and bond markets struggling. The best performing mixed-asset sector was the IA Targeted Absolute Return sector, which grew 1.34%**.

Funds in this sector aim for positive returns in a variety of market conditions and aim to provide some shelter from volatility when things turn sour. There are no guarantees though and they can still rise and fall in value. You could still make a loss.

The worst performing was the IA Mixed Investment 0-35% Shares sector, which fell 3.37%.

Performance of mixed asset and total return funds over 12 months

Scroll across to see the full chart.

Past performance is not a guide to the future. Source: **Lipper IM, to 30/04/2022.

Annual percentage growth

Apr 17 - Apr 18 Apr 18 - Apr 19 Apr 19 - Apr 20 Apr 20 - Apr 21 Apr 21 - Apr 22
IA Flexible Investment 5.78% 3.26% -4.44% 24.54% -0.46%
IA Mixed Investment 0-35% Shares 1.59% 2.21% -0.66% 9.31% -3.37%
IA Mixed Investment 20-60% Shares 3.05% 2.51% -3.64% 16.23% -1.25%
IA Mixed Investment 40-85% Shares 4.90% 4.10% -4.02% 21.51% -0.01%
IA Targeted Absolute Return 1.92% -0.80% -1.77% 9.68% 1.34%
IA Global Mixed Bond -0.01% 3.27% 3.08% 3.88% -6.36%
FTSE All-Share 8.16% 2.62% -16.68% 25.95% 8.72%

Past performance is not a guide to the future. Source: *Lipper IM, to 30/04/2022.

How have mixed asset and total return funds on the Wealth Shortlist performed?

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

Remember 12 months is a short timeframe when looking at how an investment has done. Past performances isn’t a guide to the future. Investments should be held as part of a diversified portfolio for the long term – by long term we mean at least five years.

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.

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.

Troy Trojan was the strongest performing Wealth Shortlist fund in this sector over the past 12 months, returning 7.96%* – above its IA Flexible Investment peer group average of -0.46%.

Avoiding large losses has been an important characteristic of the fund and it’s tended to come into its own and hold up well in weaker markets. We saw this when the tech bubble burst in 2001-2002 and during the global financial crisis in 2008.

As markets fell, some of the fund’s investments in shares detracted from performance. A combination of rising inflation, supply constraints and the crisis in the Ukraine put pressure on businesses. But other parts of the fund held up well, including gold investments, which can do well when uncertainty hits.

Read our latest update on the fund

Baillie Gifford Managed was the worst performing Wealth Shortlist fund in the sector over the last 12 months returning –18.28%. The managers have tended to invest more in shares than many other mixed-asset funds, so we expect the fund to perform well compared to peers when stock markets rise, but lag behind when markets fall.

The fund’s growth style of investing has been out of favour over the last 12 months, partly due to sharp increases in inflation and rising interest rates. This has held back the fund’s performance.

This fund has a holding in Hargreaves Lansdown Plc.

Read our latest update on the fund

Annual percentage growth

Apr 17 - Apr 18 Apr 18 - Apr 19 Apr 19 - Apr 20 Apr 20 - Apr 21 Apr 21 - Apr 22
Baillie Gifford Managed 8.66% 9.56% 6.65% 37.94% -18.28%
Troy Trojan (O Accumulation)† -1.21% 4.93% 8.60% 8.36% 7.96%
IA Mixed Investment 40-85% Shares 4.90% 4.10% -4.02% 21.51% -0.01%
IA Flexible Investment 5.78% 3.26% -4.44% 24.54% -0.46%

Past performance is not a guide to the future. Source: Lipper IM*, to 30/04/2022.

†The X unit class of this fund is featured on our Wealth Shortlist. However, we've used the O unit class here as it was launched earlier, and has a longer track record of performance data.

VIEW TROY TROJAN FACTSHEET INCLUDING CHARGES

VIEW TROY TROJAN KEY INVESTOR INFORMATION

VIEW BAILLIE GIFFORD MANAGED FACTSHEET INCLUDING CHARGES

VIEW BAILLIE GIFFORD MANAGED KEY INVESTOR INFORMATION

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    Our fund research is for investors who understand the risks of investing and that investing in 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.

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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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