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Understanding total return funds – what investors need to know

Mixed asset total return funds have had a difficult time since the start of 2022. In this article we take a look at the challenges of assessing short-term performance for these sorts of funds.

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.

This article is more than 6 months old

It was correct at the time of publishing. Our views and any references to tax, investment and pension rules may have changed since then.

There are times when every investment, sector and stock market will struggle. And since the start of 2022, mixed asset total return funds have faced a fair few challenges.

But what are they, why are they struggling and what could this mean for investors?

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 fall as well as rise in value, so you could get back less than you invest. Past performance is not a guide to the future.

Mixed and total return sector review – keep calm and carry on?

What are multi asset total return funds?

The phrase multi-asset means funds that invest in several different asset classes like shares, bonds, currency, and property.

A ‘total return’ mindset typically means investors who are looking to provide a positive return over the course of a market cycle.

Market cycles vary in length, but we think it’s best to use five years as an example.

These types of funds rarely look to outperform the wider stock market over the long term. Instead, they’re usually looking to provide more steady returns over time.

So, while you might get a higher return from investing only in company shares, the logic is you’ll experience less ups and downs in funds like this.

This is why lots of these funds have more than one objective, like a performance target as well as a low volatility target or something based around limiting losses.

However, because these funds are invested in different asset classes, as well as having more than one objective, setting a benchmark to compare performance is challenging.

Part of the challenge is there are potentially lots of different ways you could set a comparator.

There’s a balance between using something that’s likely to be a good comparator at different points in time, but is potentially complicated, and using something that’s simple, measurable, and easy to understand.

Why isn’t there a set of standard indices for use by these funds?

This is mainly because most of these funds have differing mixes of the assets that they invest in, but they also use different assets too. That makes it hard to create a ‘standard’ set of benchmarks.

Simpler performance comparators

Rather than use a bespoke performance comparator, which are often more complex and harder to understand, many of these funds prefer to focus on something that’s more simple. This is usually chosen to reflect the types of longer-term returns the fund is looking to provide.

This often means funds will use cash +X% or inflation +Y% per year, with the caveat that this is measured over five year rolling periods – implying that they might not be appropriate to use for shorter-term performance comparison.

On the face of it this is sensible, reasonable, and practical.

While it’s always best to invest for the long term, investors do look at short-term performance for indications as to whether the manager will achieve their longer-term objectives.

This makes using cash or inflation + performance comparators difficult, because they always increase in value (while inflation can be negative, this is extremely rare).

These funds are investing in assets that go up and down in value all the time and when there are wider economic difficulties, they will lose value.

This is why they insist on considering performance over a minimum of five years. It allows them to go up and down in value during that time, but hopefully end up ahead of their comparator.

How have total return funds performed?

The last two years have seen a difficult investing backdrop, particularly 2022 where both bonds and company shares lost value overall. These two asset classes are the most widely used in multi asset total return funds. This means it’s reasonable to expect these funds to have lost value, particularly in 2022.

But cash continued to provide a positive return over the period.

And the cause of the difficult market backdrop has been high inflation.

Over the short term, there’s a clear disconnect between fund performance and these easy-to-understand performance comparators. But that’s reasonable given the circumstances and it’s important to remember that these are investments that should be held over the long term.

And don’t forget that many of these funds will have other objectives like fewer ups and downs or limiting downside losses, which they might have achieved.

Performance comparators are clearly an important way of looking at whether a fund has been successful over a period of time. But it’s essential that any assessments are made considering the wider context of what’s happening in markets.

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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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