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Multi-manager view

There is an ongoing debate as to whether IMA sector denominations offer sufficient clarity to IFAs and their clients to help them make appropriate investment decisions. Take the balanced managed sector. The name seems to suggest there should be a balance between a portfolio’s equity and non-equity holdings but often these funds have a considerable equity bias. The IMA rules state that balanced funds can have as little as 15 per cent in non-equity and there is no prescription as to whether it should consist of bonds, cash or something else.

Being able to invest in a broader range of assets gives fund managers greater investment flexibility but it also risks causing a mismatch between investor expectations and what the manager is doing.

In practice, the non-equity portions of balanced funds are often in bonds or cash. However, in the current climate, that does not necessarily mean they offer the sort of risk levels that many buyers of these funds may have been led to expect in discussions with their IFA. In the last few months, we have seen an extraordinary influx of liquidity into the sovereign and corporate bond markets.

As a result, if we find ourselves in a deflationary environment for some time, corporate and government bonds may remain highly valued. But if growth returns and inflation raises its ugly head, there could be a dramatic unwinding of bond prices. This could make Government bonds an especially difficult place to be and far from “risk-free”. There is an argument that as balanced funds are often more aligned with equities than bonds, many could benefit from this reversal. It also counters the historical assumption that all equities are always riskier than all bonds. They are in the sense that they have a greater potential to be reduced to zero but not necessarily in terms of immediate, specific and likely valuation risk.

In my view, the bond threat is one of several considerable risks in the world today, triggered by growing economic imbalances. Another is the rush of Western liquidity into emerging markets. Already, countries such as Thailand, Brazil and South Korea have imposed a variety of capital controls in an attempt to stem this tide of money. Capital controls almost never work unless the government runs the economy, as it does in China, so inflation is likely to follow.

John Chatfeild-Roberts is chief investment officer of Jupiter Asset Management

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