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FE Adviser Fund Index

Over the past three years, the FE Adviser Fund Index benchmark portfolios have weathered challenging market conditions.

One striking feature has been the shift away from absolute return vehicles that look to offer steady positive returns, irrespective of market conditions. In the gloom of late 2008, many of these products were seized upon by investors as a way to protect against markets in freefall.

In the November rebalancing of that year, absolute return funds were represented in the top 10 holdings of all three AFI portfolios. The Cazenove UK absolute target fund featured in the aggressive, balanced and cautious most-picked while BlackRock UK absolute alpha was third in the balanced and top of the cautious.

Yet after the rebalancing in November last year, neither of these funds managed to make it into the top 10, with the Cazenove fund ejected from the AFI portfolios as a whole.

Some panellists are not surprised about the fate of these types of products. Rowan Dartington head of collectives research Tim Cockerill says: “With the absolute return funds, I am not surprised they came in when they did as people were looking for some kind of panacea. I am equally not surprised they have been kicked out as they have generally proven quite disappointing.”

Difficult markets, however, have kept panellists on the lookout for funds that can take advantage of perceived areas of value but quickly shift to a defensive stance if market conditions turn. The appeal of flexibility helps to explain the rise of strategic bond funds, which played a significant part in reducing the stranglehold that absolute return vehicles briefly held on alternative strategies for retail investors.

Top of both the balanced and cautious portfolios is now the Legal & General dynamic bond trust. The trust, managed by Richard Hodges, is described in its literature as “an unconstrained, global approach to fund management” that is designed to perform throughout the economic cycle and uses “sophisticated instruments to manage the fund’s volatility”.

Over the past three years, the trust has returned 51.24 per cent to January 30, against an IMA strategic bond sector average return of 41.28 per cent but the trust has fallen by 0.94 per cent against an average sector gain of 4.1 per cent over the past 12 months. One-year numbers should be treated with caution but this does highlight the fact that even flexible products are not immune from potential pitfalls.

The AFI portfolios do suggest, however, that panellists have persisted in a balanced approach to investment. Across the portfolios, longer-term growth plays such as emerging market equity funds are set against less volatile developed market equities and, especially in the case of the cautious portfolio, fixed-income products.

That said, there is a pronounced slant towards income. Invesco Perpetual income has found its way into the top 10 picks across the aggressive, balanced and cautious portfolios. In fact, at last November’s rebalancing nine new income funds were added as new entries to the benchmark indices.

Data supplied by FE


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