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Adviser Fund IndexOn the defensive

The story for the Adviser Fund Index balanced portfolio over the May rebalancing is one of a retreat in sentiment from Europe and fixed-interest investments. Both the fixed-interest and corporate bond sectors saw significant falls in panellists’ allocations while cash levels also saw a modest drop. The beneficiaries of this allocation switch were UK and Asia-Pacific equities.

Overall geographical allocations to Britain and Europe also fell in the rebalancing, unsurprising given recent events on the continent. “On a broad economic perspective, people are negative on the UK and Europe,” says Chelsea Financial Services managing director and AFI panellist Darius McDermott.

The recent turbulence in the eurozone, which began as a fiscal crisis in Greece and has become a broader debate on the stability of the monetary union, has certainly had an impact on investment decisions. In local currency terms, the DJ Euro Stoxx 50 index has fallen 14.28 per cent since the start of April while the FTSE 100 index has tracked the losses and is down by 13.42 per cent, according to Financial Express.

The turmoil has caused the euro to slip by almost 6.5 per cent against sterling from its recent peak on March 10, while it has dropped by more than 10 per cent against the dollar over that period.

The volatility in equity markets makes it all the more bizarre that panellists seem to be reducing their allocation of bonds

Chartwell investment research manager and AFI panellist James Davies says the current situation does not necessitate completely abandoning a market the size and depth of Europe. “We have slightly reduced our European holdings but we think it would be an overreaction to completely sell out,” he says. “If we look at our core European fund, Cazenove European, it has done less well than some other regions but it is by no means disastrous.”

The Cazenove European fund, managed by Chris Rice, has been sitting fifth out of 98 funds in the Investment Management Association Europe ex UK sector over the past three years. In the last six months, however, the fund has fallen by 11.2 per cent against an average sector loss of 9.98 per cent.

Both McDermott and Davies say the volatility in equity markets makes it all the more bizarre that panellists seem to be reducing their allocation of bonds. One possible reason for the shift is that panellists might be cashing in on the success the sector enjoyed over the past year. The impressive performance of the asset class combined with the uncertain outlook for 2010 may have convinced panellists to lock in gains.

McDermott, however, says there may still be some value left in the asset class, providing you can pick managers with unconstrained mandates. “We left our fixed-interest allocation steady mostly because we use strategic bond funds,” he says. “A lot of people became concerned that investment-grade had such a good year so there has been some profit-taking.”

Indeed, the latest rebalancing has not been uniformly negative for fixed-interest funds. The most popular fund in the balanced portfolio was, in fact, the L&G dynamic bond fund, managed by Richard Hodges, which invests across the fixed-income spectrum and can take both long and short positions.

As volatility in the market rises, investors are looking increasingly for defensive strategies. With interest rates on cash still negligible, this could mean that funds using the full spectrum of Ucits III powers steal much of the focus for retail investors.


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