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The next generation of cautious managed funds

Most investors want two things from their investment – a stable return with as little risk as possible. One of the best ways to achieve this goal is through diversification at the asset allocation level, in other words, getting the right split between equities, bonds, property and cash at the right time.

There are huge diversification benefits to be achieved from correctly predicting which asset classes will outperform. Over the last year alone, equities generated returns in excess of 10% while bonds trailed behind. Concentrating on the right asset classes and avoiding the laggards in this time would therefore have given you an indisputable advantage.

Flexibility undoubtedly comes into play here – a fund manager needs to have the freedom to back his convictions. So while diversification at the asset allocation level can reap rewards, unless a fund manager can support his investment decisions with 100% conviction, a multi-asset strategy will start to lose its impact.

A fund manager should be able to back his asset allocation choices with belief in order to achieve the best possible returns for investors. This is why the M&G Cautious Multi Asset Fund is the first in the next generation of cautious managed funds. Unlike managers who practice tilting, whereby they move asset class weightings by a small amount around a predetermined portfolio framework, the fund’s manager, Citywire AAA rated David Jane has the power to fully support his investment decisions.

“Why should a fund manager who does not expect bonds to perform well devote nearly half of his portfolio’s assets to this area of the market?” As David Jane says, a fund manager who is focusing on asset allocation as the key driver of performance should not be shackled by a rigid portfolio structure but should instead enjoy the freedom to act as strongly and as dynamically as possible.

He adds: “Only in this way, can investors have access to top-performing asset classes while still retaining balance and diversification through other areas of the market. The great thing about the M&G Cautious Multi Asset Fund is that I have the flexibility to back my views with conviction.”

To help ensure that the fund’s risk is sufficiently diversified, the M&G Cautious Multi Asset Fund can invest in assets, which have little correlation with the traditional areas of equities and bonds such as commercial property. While owning property shares will expose investors of a multi-asset fund to more risk, investing in funds which invest in actual bricks and mortar can enhance performance, while limiting volatility due to their lack of correlation with the equity market over the longer term.

Risk analysis also has an important role to play in the running of a multi-asset fund. As well as deciding which investments to include in his portfolio, a fund manager should keep abreast of its risk levels to minimise volatility wherever possible. With this in mind, David talks regularly with M&G’s in-house risk analysts who keep track of the fund’s holdings, performance and risk levels to help him develop conviction in his investments. Input from the risk analysts also improves the structure of the portfolio, with the aim of maximising investment returns while keeping risk in line with the sector average.

Given the potential diversity of a multi-asset portfolio its manager must be in a position to fully exploit the growing number of asset classes at his fingertips. This is where a large asset management house like M&G, with expertise and strength across all of these investment areas can provide an edge in the running of multi-asset portfolios. The fund manager must be able to leverage the skills and resources and gain an informed understanding of what to expect from each asset class in terms of risk and reward. He can only develop this knowledge through access to a high level of competence in each of those areas.

Unconstrained multi-asset portfolios such as the M&G Cautious Multi Asset Fund offer investors potential for steady reliable returns with limited risk. With access to more asset classes than traditional cautious managed funds and more flexibility through active asset allocation, the M&G Cautious Multi Asset Fund is the next generation of cautious managed funds.

For financial advisers only. Not for onward distribution. No other persons should rely on the information contained in this advertisement. Citywire rating as at 31 August 2007. A Citywire rating is not a recommendation to buy, sell or hold any interest in an investment.


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