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Do balanced managed funds have a future?

The future of balanced managed funds has come under the spotlight after OPM Fund Management closed its balanced managed fund last month, claiming such funds will not be viable under the RDR.

OPM replaced the fund with the EFA OPM diversified target return and the EFA OPM worldwide opportunities funds.

Chief investment officer Tony Yousefian says: “We do not see a future for balanced managed-type funds after the RDR. We think balanced managed and cautious managed funds will have a limited appeal as IFAs will have to construct a portfolio for clients or outsource to a full-time portfolio manager. You will not see IFAs buying just one fund and putting all their balanced investment in it.”

Questions have been raised about the risk levels associated with many balanced managed funds.

RBS analysis released last month claimed that more than four out of the five biggest funds in the cautious and balanced managed sectors adjusted their equity exposure by 20 per cent or less between October 31, 2007 and February 28, 2009.

The research drew on analysis of Morningstar data during the financial crisis that shows two-fifths of the funds altered their equity exposure by less than 10 per cent. Over this period, the volatility of the funds in these sectors went from 5.2 per cent to 16.6 per cent.

The Investment Management Association is currently reviewing its product sector definitions. The IMA balanced managed sector has a maximum of 85 per cent equity exposure, while the cautious managed sector is restricted to 60 per cent.

Cazenove manager of the £65m Cazenove multi-manager balanced fund Marcus Brookes says the IMA should consider a new definition that sits between cautious managed and balanced managed.

He says: “The investment world will change significantly with the RDR. Very wealthy people will get full bespoke investment solutions from discretionary fund managers but not everyone will be able to afford that and there will need to be one-stop solutions, like active, cautious or balanced managed funds.

“I wonder whether we should have a stage between balanced managed and cautious. Going from maximum 6o per cent to max 85 per cent is quite a big jump. This is something the IMA could look at.”

Tom Becket, chief investment officer at PSigma, which has a balanced managed fund of funds, says: “There are a few balanced funds that consist of lots of equities, a few bonds and a bit of cash. I think it might be better to separate out performance of genuinely multi-asset funds from these funds. There is a big split in differential in the sector.

“Multi-manager multi-asset funds should have their own sector separate from other funds in the managed sector.”

Becket says funds should be defined on the basis of risk.

He says: “The easiest way to measure fund of funds is to measure the risk of the portfolio’s total assets and that might give advisers a better insight into how risky the portfolio is.

“Fund managers in the balanced managed sector have been static in asset allocation. We tend to have a high portfolio turnover. We would never manage our fund towards the higher end of the sector, to 85 per cent in equities.”

HSBC Global Asset Management head of wholesale, EMEA Andy Clark says increased transparency on balanced managed and cautious funds is vital.

He says: “People want a managed solution and if you get transparency on what is under the label investors are more likely to invest. It is hard to know what balanced managed funds hold day to day, as the sector covers so many assets. Cautious funds send the message of safety and that can be misleading. One fund manager’s cautious is another person’s risky.”

Clark says tougher regulation or standardisation on asset allocation is not the answer. He says that being clear about what the funds invest in is essential rather than reducing flexibility in fund management.

Apollo balanced fund co-manager Tom McGrath says: “Statistically, the balanced managed sector is still one of the best selling of the IMA sectors. It is naive to think that balanced managed funds are a thing of the past but diversified funds will gain more traction after the RDR.”

Newton balanced managed fund manager Iain Stewart says: “We have seen good inflows into our balanced managed funds. We expect more volatility and lower returns after the RDR, but flexible balanced managed funds make sense.

“The definition of the sectors is not relevant. I think the aspirations of the funds and what they are trying to achieve and their volatility is more important than setting hard and fast limits.”

Whitechurch Securities senior analyst Ben Seager-Scott says: “The terminology balanced managed implies diversification in assets but managers are not forced to diversify.

“The sector does not define in great depth what should be in each class. Quite a lot of differently structured funds can fit into the definitions.”


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There is one comment at the moment, we would love to hear your opinion too.

  1. A fund lags its peer group by 20%, performance is dire. They close it, launch a couple of new ones, migrate assets – then make up some rubbish about RDR…

    …or am I being cynical?

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